Financial Firm Production of Inside Monetary and Credit Card Services: An Aggregation Theoretic Approach

Abstract

A monetary production model of financial firms is employed to investigate supply-side inside-money aggregation, augmented to include credit card transaction services. Inside money is a supply-side concept. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into 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 microeconomic aggregation theory, not accounting. We derive theory needed to measure the supply of the joint services of credit cards and inside money, needed to estimate the output supply function and to compute value added. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability in New York City.

Forecasting inflation and output growth with credit‐card‐augmented Divisia monetary aggregates

“… πm πc is the expenditure share of the services of credit card type j in the total services of monetary assets and credit cards. Barnett and Su (2018) employ a production model of financial firms and investigate supplyside aggregation, when financial firms produce both monetary services and credit card transactions services. Inside money is a supply-side concept.…”

“…Barnett and Su (2018) employ a production model of financial firms and investigate supply‐side aggregation, when financial firms produce both monetary services and credit card transaction services. Inside money is a supply‐side concept.…”

“…Their results are based on index number theory, which measures service flows, and are derived from economic aggregation theory. Barnett and Su (2018) derived the corresponding supply side theory needed to measure the production of the joint services of credit cards and inside money. The resulting supply side index is needed in estimation of the output supply function of banks and to measure value-added in banking.…”

The Barnett Critique

“…While demand-side aggregation theory is based on the microeconomic theory of rational consumer behavior, supply-side aggregation theory is based on rational firm behavior. Barnett and Su [17], derived the supply-side monetary aggregation theory for banks, which produce monetary services along with credit card deferred payment services. That theory is also relevant to shadow banking production of such services.…”

The credit card-augmented Divisia monetary aggregates: an analysis based on recurrence plots and visual boundary recurrence plots

“…Over 80% of American households with credit cards are currently borrowing and paying interest on credit cards. " Motivated by these developments in the financial services industry, recently Barnett and Su (2016, 2018 and Barnett et al (2023) introduced Divisia monetary aggregates that jointly aggregate the services provided by credit cards and the services provided by monetary assets. The new aggregates are known as the credit card-augmented Divisia and credit card-augmented Divisia inside monetary aggregates.…”