The credit-card-services augmented Divisia monetary aggregates

Barnett, William and Chauvet, Marcelle and Leiva-Leon, Danilo and Su, Liting (2016): The credit-card-services augmented Divisia monetary aggregates.

Abstract

While credit cards provide transactions services, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on aggregation theory, not accounting. We derive theory needed to measure the joint services of credit cards and money. We provide and evaluate two such aggregate measures having different objectives. We initially apply to NGDP nowcasting. Both aggregates are being implemented by the Center for Financial Stability, which will provide them to the public monthly, along with Bloomberg Terminals.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit Cards, Money, Credit, Aggregation Theory, Index Number Theory, Divisia Index, Risk, Asset Pricing, Nowcasting, Indicators.
• Subjects: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models; 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; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

References

Banbura, M. and G. Runstler (2011). “A Look into the Factor Model Black Box: Publication Lags and the Role of Hard and Soft Data in Forecasting GDP”. International Journal of Forecasting 27(2): 333-346.

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 Banking14: 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. (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 (2011). “How Better Monetary Statistics Could Have Signaled the Financial Crisis”. Journal of Econometrics 161(1): 6-23.

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 B. Tang (1916).“ Chinese Divisia Monetary Index and GDP Nowcasting," Open Economies Review, forthcoming.

Barnett, W. A. and S. Wu (2005). “On User Costs of Risky Monetary Assets,” Annals of Finance1, 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. and L. Su (2016). “Data Sources for the Credit-Card Augmented Divisia Monetary Aggregates,” Research in International Business and Finance, Elsevier, forthcoming.

Barnett, W. A., M. Chauvet, and D. Leiva-Leon (2016). “Real-Time Nowcasting of Nominal GDP Under Structural Break,” Journal of Econometrics, 191(2), 312-324.

Barnett, W. A., M. Chauvet, D. Leiva-Leon, and L. Su (2016), “Nowcasting Nominal GDP and the Credit-Card Augmented Divisia Monetary Aggregates,” Center for Financial Stability working paper, New York City. Also available in the Johns Hopkins University Studies in Applied Economics working paper series as SAE No. 59.

Barnett, W.A., J. Liu, R.S. Mattson, and J. van den Noort (2013). "The New CFS Divisia Monetary Aggregates: Design, Construction, and Data Sources," Open Economies Review 24: 101-124.

Belongia, M.T. and P.N. Ireland (2006). “The Own-Price of Money and the Channels of Monetary Transmission.” Journal of Money, Credit, and Banking 38: 429-45

Belongia, M.T. and P.N. Ireland (2014). “The Barnett Critique after Three Decades: A New Keynesian Analysis”. Journal of Econometrics 183(1): 5-21.

Belongia, M.T. and P.N. Ireland (2015a). “Interest Rates and Money in the Measurement of Monetary Policy.” Journal of Business and Economic Statistics 332: 255-269.

Belongia, M.T. and P.N. Ireland (2015b).“A ‘Working’ Solution to the Question of Nominal GDP Targeting.”Macroeconomic Dynamics 19: 508-534.

Belongia, M.T. and P.N. Ireland (2016). “Money and Output: Friedman and Schwartz Revisited.” Journal of Money, Credit and Banking 48(6): 1223-1266.

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.

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

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

Divisia, F. (1925 and 1926). “L’IndiceMonétaire et la Théorie de la Monniae”. Revue d’ÉconomiePolitique 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.

Giannone,D., L. Reichlin, and D. Small (2008).“Nowcasting: The Real-Time Informational Content of Macroeconomic Data.” Journal of Monetary Economics, 55(2008), 665-676.

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

Hjertstrand, Per, J. L. Swofford, and G. Whitney (2016). “Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption, Leisure and Money with Incomplete Adjustment, Journal of Money, Credit, and Banking, forthcoming.

Mariano, R., and Y. Murasawa (2003). A New Coincident Index of Business Cycles based on Monthly and Quarterly Series. Journal of Applied Econometrics, 18(4) 427-443.

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.

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

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

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.

Serletis, A. and S. Rahman (2013). “The Case for Divisia Money Targeting,” Macroeconomic Dynamics 17: 1638-1658.

Stock, J. H., and M. W. Watson (1989), New Indexes of Coincident and Leading Economic Indicators. NBER Macroeconomics Annual, 351-393.

Telyukova, I. and R. Wright (2008). “A Model of Money and Credit, with Application to the Credit Card Debt Puzzle,” Review of Economic Studies 75: 629-647.

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