International Financial Aggregation and Index Number Theory: A Chronological Half-century Empirical Overview

Abstract

This paper comprises a survey of a half century of research on international monetary aggregate data. We argue that since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless "paradoxes," and have produced decades of misunderstandings in international monetary economics research and policy. While better data, based correctly on index number theory and aggregation theory, now exist, the official central bank data most commonly used have not improved in most parts of the world. While aggregation theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. No other area of economics has been so seriously damaged by data unrelated to valid index number and aggregation theory. In this paper we chronologically review the past research in this area and connect the data errors with the resulting policy and inference errors. Future research on monetary aggregation and policy can most advantageously focus on extensions to exchange rate risk and its implications for multilateral aggregation over monetary asset portfolios containing assets denominated in more than one currency. The relevant theory for multilateral aggregation with exchange rate risk has been derived by Barnett (2007) and Barnett and Wu (2005).

Money and Inflation: Some Critical Issues

“…Arguing somewhat against the use of M2-type series as measures of transactions money, at least for studies using long sample periods, are the empirical results coming from the Divisia procedure, which Lucas (2000) argues is the best way to construct monetary aggregates. The Divisia procedure produces a series that downweights much of the non-M1 component of M2, and leads to quite different behavior of M2 and Divisia M2 during key episodes in the 1970s and 1980s (see Barnett and Chauvet, 2008).…”

Money and Inflation: Some Critical Issues

“…The Divisia procedure produces a series that downweights much of the non-M1 component of M2, and leads to quite different behavior of M2 and Divisia M2 during key episodes in the 1970s and 1980s (see Barnett and Chauvet, 2008). …”

Divisia and Simple Sum Monetary Aggregates: Any Empirical Relevance for Turkey?

“…In this regard, deposits in banks are separated between those in Turkish lira and foreign exchange by their ma-turities 7 such that both Turkish lira and foreign currency deposits are expressed as the sum of currencies, sight deposits, time deposits up to 1-month, 3-month, 6-month and 1-year and more. The period is between 2005M12 -2016M4.…”

“…The total expenditure on monetary assets is given by: 7 The related data is taken from: http://evds.tcmb.gov.tr/index_en.html. (accessed 18/11/2016).…”