The Discounted Economic Stock of Money with VAR Forecasting

Do Currency Equivalent Monetary Aggregates Have an Edge over Their Simple Sum Counterparts?

“…is the subjectively discounted marginal rate of inter-temporaral substitution between consumption in the current period t and the future period s. However, Barnett et al (2006) showed that CE aggregates still exhibit a small downward bias since the total expenditure of monetary services assumed to follow a martingale process. In this context, Kelly (2011) showed that CE aggregate can be treated as CSM which is defined as the discounted present value of the monetary services implied by the current portfolio of monetary assets.…”

“…In reality, the simple sum aggregates tend to overestimate the actual money stock and inclusion of interest bearing assets will increase this upward bias considerably. Following Barnett et al (2006Barnett et al ( , 2008 and Kelly (2009Kelly ( , 2011 it can be showed that the simple sum aggregates compound both discounted present value of monetary services and the Public Finance, 2, 2 (2013): 107-143 discounted present value of return yielded by the monetary assets. Thus the simple sum aggregates (SSI) can be decomposed as follows:…”

“…Similarly, Barnett et al (2006) empirically examined the properties of CE aggregates in terms of Barnett's ESM and found that it approximates 2 Kelly (2009Kelly ( , 2011 derived ISM through the application of asset pricing theory and is defined as…”

“…Taking uncertainty into consideration the definition of ESM is modified by applying consumption based capital asset pricing model. Following Barnett et al (2006, 2008) it is given as …”

The Quantity Theory Revisited: A New Structural Approach

“…Finally, the monetary aggregation literature attributes the lack of informational content of monetary aggregates to the theoretical shortcomings of the simple sum monetary aggregates frequently used in empirical work [see, e.g., Barnett 1980, Barnett and Serletis 2000, and Barnett and Chauvet 2011. A number of studies have shown that simple sum aggregates significantly overstate the money stock [Barnett et al 2005;Barnett et al 2008] and mask the dynamics of the relationship between money and interest rates [Kelly 2009;Kelly et al 2011]. Therefore, in line with recent approaches to incorporating money or liquidity effects into structural macro-models [see, e.g., Belongia and Ireland, 2012, p. 1], we employ a Divisia M4 monetary aggregate provided by the Center for Financial Stability [Barnett et al (2013)] rather than a simple sum monetary aggregate.…”