Search results

In recent years, there has been renewed interest in index number and aggregation theory, since the two previously divergent fields have been successfully unified. The underlying aggregator functions which are weakly separable subfunctions of utility and production functions, are the building blocks of economic theory, and the derivation of index numbers based upon their ability to track those building blocks is now called the economic theory of index numbers. William Barnett, the coeditor of this volume, introduced modern economic index number theory into monetary economics. His merger of economic index number theory, with monetary theory was based upon the use of Diewert's approach to producing superlative nonparametric approximations to the theoretically exact aggregator functions.This book comprises a focussed and unified collection of Barnett's most important publications in this area. The papers in the book have been organized into logical sections, with unifying introductions and overviews. The result is a systematic development of the state-of-the-art in monetary and financial aggregation theory. The sections cover the origin of the user cost price of monetary services. Exact aggregation of monetary assets on the demand side for consumers and firms, and on the supply side for financial intermediaries, general equilibrium of all economic agents' demands and supplies, dynamic solution of the exact system, and extension to monetary aggregation under risk. The extension of index number theory to the case of risk is completely general, and can be applied to tracking any exact economic aggregator under risk. In all cases, the criterion used for evaluation is the tracking ability of the approximation to the exact aggregator function of economic theory.Many of the empirical and policy puzzles in monetary economics disappear when simple sum monetary aggregates are replaced by index numbers that are coherent with theory. Simple sum monetary aggregates became incoherent with theory, when monetary assets began paying interest and therefore could no longer be viewed as perfect substitutes. This is a useful tool to those associated with economics departments within universities, business schools, central banks and federal governments, financial institutions including underwriters, bankers and stockbrokers

The concept of monetary aggregates has always followed changes in monetary policy. Its development reflects the victories and mistakes of monetary authorities. Although they played the roles of operational and intermediate targets in the past, today they are used in the analysis of the banking sector and financial stability. Some economists believe that broad monetary aggregates such as Divisia help explain macroeconomic dynamics and should be included in the central bank's interest rate decision rules. In addition, functional monetary aggregates are proposed as an alternative, behind which there are complex calculations. In the near future, the introduction of central bank digital currencies must lead to a redefinition of the monetary base and simple aggregates.

In the aftermath of the 2007-08 financial crisis when short-term nominal interest rate reached zero, many central banks worldwide have adopted unconventional monetary policy tools such as quantitative easing where central banks inject money via purchases of long-term government bonds to stimulate their economies. Using the officially published simple-sum monetary aggregates to measure monetary service flows of the economy can be misleading since the simple-sum index ignores the liquidity characteristics of assets in monetary aggregates. Divisia indexes remove the investment motive and measure all other monetary services associated with economic liquidity, by allowing the weights of monetary assets to vary depending on their monetary services at the margin. This dissertation introduces key economic indicators for the Gulf states and discusses the main issues related to monetary policy and theory, aggregation theory and index number theory. It outlines the methods for constructing proper inflation and monetary indexes that are consistent with monetary theory and aggregation theory. Moreover, it provides guidelines for creating optimal monetary aggregation, as suggested by the originator of Divisia monetary aggregation, William A. Barnett. This dissertation reports on the first Divisia monetary aggregates for the complete GCC area and focuses on economic measurement. The second chapter builds monthly time-series of Divisia monetary aggregates for the Gulf area for the period of June 2004 to December 2011, using area-wide data. It also offers an "economic stability" indicator for the GCC area by analyzing the dynamics pertaining to certain variables such as the dual price aggregates, aggregate interest rates, and the Divisia aggregate user-cost growth rates. Our findings unfold the superiority of the Divisia indexes over the officially published simple-sum monetary aggregates in monitoring the business cycles. There is also direct evidence on higher economic harmonization between GCC countries--especially in terms ...

The capability of monetary aggregates to generate stable links with fundamental economic indicators verifies the effectiveness of monetary targeting. However, traditional monetary aggregates become flawed when financial reforms take place. As official monetary aggregates fail to maintain stable links with crucial economic indicators in Malaysia, monetary targeting has been substituted by interest rate targeting. Therefore, Divisia monetary aggregates, which are considered superior to their simple-sum counterparts are used in the investigation for Malaysia. The findings imply that Divisia M2 money demand is stable and capable of generating appropriate coefficients with correct signs for the variables included. Thus, Divisia money has shed new light on the usefulness of monetary targeting in formulating monetary policy in Malaysia.

This paper examines the appropriate formulation of the monetary aggregate for the Nigerian economy for the period 1970:1-2000:4 for the determination of real output. This examination covers simple sum, Variable Elasticity of Substitution (VES) and Divisia (DV) aggregation over currency, demand deposits and savings deposits. The user cost of liquid assets is employed in the construction of both the DV and the VES aggregates. Since our variables proved to be I(1), the Johansen cointegration and error-correction modelling technique were used. Our findings for the Nigerian economy are that currency does as well as or better than any narrow- or broad-money measure in explaining industrial production. Further, the simple sum M1 and M2 outperformed both the VES and Divisia aggregates. Therefore, monetary policy in Nigeria should focus on the supply of currency and/or of narrow money, rather than on broad money or the Divisia aggregates.