The joint services of money and credit

Barnett, William A. and Su, Liting (2014): The joint services of money and credit.

Abstract

While credit cards provide transaction services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. But economic aggregation theory and index number theory are based on microeconomic theory, not accounting, and measure service flows. We derive theory needed to measure the joint services of credit cards and money. The underlying assumption is that credit card services are not weakly separable from the services of monetary assets. Carried forward rotating balances are not included, since they were used for transactions services in prior periods. The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. In the transmission mechanism of central bank policy, our results raise potentially fundamental questions about the traditional dichotomy between money and some forms of short term credit, such as checkable lines of credit. We do not explore those deeper issues in this paper, which focuses on measurement.

• Item Type: MPRA Paper
• Language: English
• Keywords: credit cards, money, credit, aggregation theory, index number theory, Divisia index, risk, asset pricing.
• Subjects: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation; E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth ; Environmental Accounts; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Arrow, K. J. and F. Hahn (1971). General Competitive Analysis. San Francisco, Holden-Day.

Barnett, W. A. (1978). "The User Cost of Money," Economics Letter 1: 145-149. Reprinted in W. A. Barnett and A. Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 1: 6-10.

Barnett, W. A. (1980). "Economic Monetary Aggregates: An Application of Aggregation and Index Number Theory," Journal of Econometrics 14: 11-48. Reprinted in W. A. Barnett and A. Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 1: 6-10.

Barnett, W. A. (1982). "The Optimal level of Monetary Aggregation," Journal of Money, Credit, and Banking 14: 687-710. Reprinted in W. A. Barnett and A. Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 7: 125-149.

Barnett, W. A. (1987). “The Microeconomic Theory of Monetary Aggregation,” in W. A. Barnett and K. Singleton (eds.), New Approaches to Monetary Economics, Cambridge U. Press. Reprinted in W. A. Barnett and A. Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 3: 49-99.

Barnett, W.A. (1995). “Exact Aggregation under Risk,” in W. A. Barnett, M. Salles, H. Moulin, and N. Schofield (eds.), Social Choice, Welfare and Ethics, Cambridge University Press, Cambridge. Reprinted in W. A. Barnett and A. Serletis, (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 10: 195-216.

Barnett, William A. (2012). Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy, MIT Press, Cambridge, MA.

Barnett, W.A. and M. Chauvet (2011a). “How Better Monetary Statistics Could Have Signaled the Financial Crisis”. Journal of Econometrics 161(1): 6-23.

Barnett, W.A. and M. Chauvet (eds) (2011b). Financial Aggregation and Index Number Theory. Singapore: World Scientific.

Barnett, W. A. and A. Serletis (1990). “A Dispersion-Dependency Diagnostic Test for Aggregation Error: with Applications to Monetary Economics and Income Distribution,” Journal of Econometrics 43: 5-34. Reprinted in W. A. Barnett and A. Serletis (eds.), 2000, The Theory of Monetary Aggregation, North-Holland, Amsterdam, chapter 9: 167-194

Barnett, W. A. and A. Serletis (eds) (2000). The Theory of Monetary Aggregation, Contributions to Economic Analysis Monograph Series, Elsevier, Amsterdam.

Barnett, W. A. and S. Wu (2005). “On User Costs of Risky Monetary Assets,” Annals of Finance 1, 35-50. Reprinted in W. A. Barnett and M. Chauvet (eds.), 2010, Financial Aggregation and Index Number Theory, World Scientific, Singapore, chapter 3.

Barnett, W. A., Y. Liu, and M. Jensen (1997). “The CAPM Risk Adjustment for Exact Aggregation over Financial Assets,” Macroeconomic Dynamics 1: 485-512. Reprinted in W. A. Barnett and A. Serletis (eds.), 2000, The Theory of Monetary Aggregation, North Holland, Amsterdam, chapter 12: 245-295.

Barnett, W. A. and A. Serletis (1990). “A Dispersion-Dependency Diagnostic Test for Aggregation Error: with Applications to Monetary Economics and Income Distribution,” Journal of Econometrics 43: 5-34. Reprinted in W. A. Barnett and A. Serletis (eds.), 2000, The Theory of Monetary Aggregation, North-Holland, Amsterdam, chapter 9: 167-194.

Belongia, M.T. and P.N. Ireland (2014a). “The Barnett Critique after Three Decades: A New Keynesian Analysis”. Journal of Econometrics 183(1): 5-21. Earlier version available at NBER Working Paper W17885, 2012.

Belongia, M.T. and P.N. Ireland (2014b). “Interest Rates and Money in the Measurement of Monetary Policy.” NBER Working Paper W20134, Journal of Business and Economic Statistics, forthcoming.

Belongia, M.T. and P.N. Ireland (2014c). “A ‘Working’ Solution to the Question of Nominal GDP Targeting”. Macroeconomic Dynamics, forthcoming.

Bernanke, Ben and Alan Blinder (1988). “Is it Money or Credit, or Both, or Neither? Credit, Money, and Aggregate Demand,” American Economic Review 78, no. 2, May, Papers and Proceedings of the One-Hundredth Annual Meeting of the American Economic Association, 435-439.

Breeden, Douglas (1979), “An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities,” Journal of Financial Economics 7: 265-296.

Campbell, J. Y. and J. H. Cochrane (1999). “By force of Habit: a Consumption-Based Explanation of Aggregate Stock Market Behavior,” Journal of Political Economy 107: 205–251.

Caves, D.W., L.R. Christensen, and W. E. Diewert (1982a). “The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity,” Econometrica 50, 1392-1414.

Cochrane, J. H. (2000). Asset Pricing, Princeton University Press, Princeton, NJ.

Diewert, W. (1976). “Exact and Superlative Index Numbers,” Journal of Econometrics 4: 115–45.

Divisia, F. (1925 and 1926). “L’Indice Monétaire et la Théorie de la Monniae”. Revue d’Économie Politique 39: 842-61, 980-1008 and 1121-51; and 40: 49-87.

Duca, J. V. and W. C. Whitesell (1995). “Credit Cards and Money Demand: a Cross-sectional Study,” Journal of Money, Credit and Banking 27: 604-623.

Feenstra, Robert C. (1986). "Functional Equivalence Between Liquidity Costs and the Utility of Money," Journal of Monetary Economics, March, 271-291.

Fischer, Stanley (1974). "Money and the Production Function," Economic Inquiry 12, pp. 517-33.

Green, H.A.J. (1964). Aggregation in Economic Analysis: An Introductory Survey. Princeton, N.J.: Princeton University Press.

Ingersoll, J. E. (1987). Theory of Financial Decision Making, Rowman and Littlefield, Totowa, NJ.

Kocherlakota, N. (1996). “The Equity Premium: It’s Still a Puzzle,” Journal of Economic Literature 34: 43–71.

Lucas, R. E. (1978), “Asset Prices in an Exchange Economy,” Econometrica 46: 1429-1445.

Marshall, D (1997). “Comments on CAPM Risk Adjustment for Exact Aggregation over Financial Assets, Macroeconomic Dynamics 1: 513–523.

Mehra, R. and E. C. Prescott (1985). “The Equity Premium: A Puzzle,” Journal of Monetary Economics 15, 145-61.

Mishkin, Frederic (1996). "The Channels of Monetary Transmission: Lessons for Monetary Policy." NBER Working Paper No. 5464.

Phlips, Louis and Frans Spinnewyn (1982). "Rationality versus Myopia in Dynamic Demand Systems," in R. L. Basmann and G. F. Rhodes (eds.), Advances in Econometrics , JAI Press, pp. 3-33.

Poterba, J.M. and J.J. Rotemberg (1987). “Money in the Utility Function: An Empirical Implementation”. Chapter 10 in W.A. Barnett and K.J. Singleton (eds) New Approaches to Monetary Economics. Cambridge: Cambridge University Press: 219-40.

Quirk, J. and R. Saposnik (1968). Introduction to General Equilibrium Theory and Welfare Economics. New York: McGraw-Hill.

Rubinstein, M. (1976). “The Valuation of Uncertain Income Streams and the Pricing of Options,” Bell Journal of Economics 7: 407-425.

Samuelson, Paul (1948). Foundations of Economic Analysis, Harvard University Press, Cambridge, Mass.

Serletis, A. and P. Gogas (2014). “Divisia Monetary Aggregates, the Great Ratios, and Classical Money Demand Functions”. Journal of Money, Credit and Banking, 46(1): 229-41.

Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, The Journal of Finance 19: 425–442.

Stein, C. (1973), “Estimation of the Mean of a Multivariate Normal Distribution,” Proceedings of the Prague Symposium on Asymptotic Statistics, September.

Törnqvist, L. (1936). “The Bank of Finland’s Consumption Price Index,” Bank of Finland Review 10: 1-8.