Skip to main content
×
×
Home

RISK ADJUSTMENT OF THE CREDIT-CARD AUGMENTED DIVISIA MONETARY AGGREGATES

  • William A. Barnett (a1) and Liting Su (a1)
Abstract

While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. Barnett et al. derived the aggregation and index number theory needed to measure the joint services of credit cards and money. They derived and applied the theory under the assumption of risk neutrality. But since credit card interest rates are high and volatile, risk aversion may not be negligible. We extend the theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer.

Copyright
Corresponding author
Address correspondence to: Liting Su, Center for Financial Stability, NY City, 1120 Avenue of Americas, 4th Floor, New York, NY 10036, USA; e-mail: lsu@the-cfs.org
Footnotes
Hide All

William A. Barnett is the Oswald Distinguished Professor of Macroeconomics at the University of Kansas. He is Director of the Center for Financial Stability in New York City and Director of the Institute for Nonlinear Dynamical Inference in Moscow. He is Editor of the Cambridge University Press journal, Macroeconomic Dynamics, and the Emerald Press monograph series, International Symposia in Economic Theory and Econometrics. He is author of the book Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy, MIT Press. The book won the American Publishers Award for Professional and Scholarly Excellence for the best book published in economics during 2012. With Nobel Laureate Paul Samuelson, he also coauthored the book, Inside the Economist's Mind, translated into seven languages. He is founder and President of the Society for Economic Measurement.

Liting Su holds degrees from the University of Kansas and Renmin University of China. She is a Research Associate specializing in aggregation-theoretic monetary aggregation for the Center for Financial Stability's program, Advances in Monetary and Financial Measurement. She has been contributing to the construction of the Augmented Divisia Monetary Aggregates for the United States under the direction of CFS Director Dr. William A. Barnett. Her current research focuses on incorporating credit card services into the CFS Divisia monetary aggregates to produce the Augmented Divisia Monetary Aggregates.

Footnotes
References
Hide All
Arrow, K. J. and Hahn, F. (1971) General Competitive Analysis. San Francisco: Holden-Day.
Barnett, W. A. (1978) The user cost of money. Economics Letter 1, 145149. Reprinted in Barnett, W. A. and Serletis, A. (eds.), 2000, The Theory of Monetary Aggregation, pp. 6–10. Amsterdam: North Holland, chapter 1.
Barnett, W. A. (1980) Economic monetary aggregates: An application of aggregation and index number theory. Journal of Econometrics 14, 1148. Reprinted in Barnett, W. A. and Serletis, A. (eds.), 2000, The Theory of Monetary Aggregation, pp. 6–10. Amsterdam: North Holland, chapter 1.
Barnett, W. A. (1987) The microeconomic theory of monetary aggregation. In Barnett, W. A. and Singleton, K. (eds.), New Approaches to Monetary Economics, Cambridge: Cambridge U. Press. Reprinted in Barnett, W. A. and Serletis, A. (eds.), 2000, The Theory of Monetary Aggregation, pp. 49–99. Amsterdam: North Holland, chapter 3.
Barnett, W. A. (1995) Exact aggregation under risk. In Barnett, W. A., Salles, M., Moulin, H., and Schofield, N. (eds.), Social Choice, Welfare and Ethics, Cambridge: Cambridge University Press. Reprinted in Barnett, W. A. and Serletis, A. (eds.), 2000, The Theory of Monetary Aggregation, pp. 195–216. Amsterdam: North Holland, chapter 10.
Barnett, W. A. (2012) Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy. Cambridge, MA: MIT Press.
Barnett, W. A. and Serletis, A. (1990) A dispersion-dependency diagnostic test for aggregation error: With applications to monetary economics and income distribution. Journal of Econometrics 43, 534. Reprinted in Barnett, W. A. and Serletis, A. (eds.), 2000, The Theory of Monetary Aggregation, pp. 167–194. Amsterdam: North Holland, chapter 9.
Barnett, W. A. and Serletis, A. (eds.) (2000) The Theory of Monetary Aggregation. Contributions to Economic Analysis Monograph Series. Amsterdam: Elsevier.
Barnett, W. A. and Su, L. (2017) Data sources for the credit-card augmented Divisia monetary aggregates. Research in International Business and Finance 39 (Part B), 899910.
Barnett, W. A. and Chauvet, M. (2011a) How better monetary statistics could have signaled the financial crisis. Journal of Econometrics 161 (1), 623.
Barnett, W. and. Chauvet, M. (eds.) (2011b) Financial Aggregation and Index Number Theory. Singapore: World Scientific.
Barnett, W. A. and Wu, S. (2005) On user costs of risky monetary assets. Annals of Finance 1, 3550. Reprinted in Barnett, W. A. and Chauvet, M. (eds.), 2010, Financial Aggregation and Index Number Theory, Singapore: World Scientific, chapter 3.
Barnett, W. A., Liu, J., Mattson, R. S. and van den Noort, J. (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economies Review 24, 101124.
Barnett, W. A., Chauvet, M., Leiva-Leon, D. and Su, L. (2016) Nowcasting Nominal GDP with the Credit-Card Augmented Divisia Monetary Aggregates. Johns Hopkins University Studies in Applied Economics, SAE working paper 59.
Barnett, W. A., Liu, Y. and Jensen, M. (1997) The CAPM risk adjustment for exact aggregation over financial assets. Macroeconomic Dynamics 1, 485512. Reprinted in Barnett, W. A. and Serletis, A. (eds.), 2000, The Theory of Monetary Aggregation, pp. 245–295. Amsterdam: North Holland, chapter 12.
Belongia, M. T. and Ireland, P. N. (2014) The Barnett critique after three decades: A new Keynesian analysis. Journal of Econometrics 183 (1), 521.
Belongia, M. T. and Ireland, P. N. (2015a) Interest rates and money in the measurement of monetary policy. Journal of Business and Economic Statistics 332, 255269.
Belongia, M. T. and Ireland, P. N. (2015b) A ‘working’ solution to the question of nominal GDP targeting. Macroeconomic Dynamics 19, 508534.
Belongia, M. T. and Ireland, P. N. (2016) Money and output: Friedman and Schwartz revisited. Journal of Money, Credit and Banking 48 (6), 12231266.
Breeden, D. T. (1979) An intertemporal asset pricing model with stochastic consumption and investment opportunities. Journal of Financial Economics 7 (3), 265296.
Campbell, J. Y. and Cochrane, J. H. (1999) By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, 205251.
Cherchye, L., Demuynck, T., Rock, B. D. and Hjerstrand, P. (2015) Revealed preference tests for weak separability: An integer programming approach. Journal of Econometrics 186 (1), 129141.
Cochrane, J. H. (2000) Asset Pricing. Princeton, NJ: Princeton University Press.
Divisia, F. (1925 and 1926) L'IndiceMonétaire et la Théorie de la Monniae. Revue d'ÉconomiePolitique 39, 842861, 980–1008, 1121–1151 and 40, 4987.
Feenstra, R. C. (1986) Functional equivalence between liquidity costs and the utility of money. Journal of Monetary Economics, 17, 271291.
Fischer, S. (1974) Money and the production function. Economic Inquiry 12, 517533.
Hjertstrand, P., Swofford, J. L. and Whitney, G. (2016) Mixed integer programming revealed preference tests of utility maximization and weak separability of consumption, leisure, and money. Journal of Money, Credit and Banking 48 (7), 15471561.
Ingersoll, J. E. (1987) Theory of Financial Decision Making. Totowa, NJ: Rowman and Littlefield.
Kocherlakota, N. (1996) The equity premium: It's still a puzzle. Journal of Economic Literature 34, 4371.
Lucas, R. E. (1978) Asset prices in an exchange economy. Econometrica 46, 14291445.
Marshall, D. (1997) Comments on CAPM risk adjustment for exact aggregation over financial assets. Macroeconomic Dynamics 1, 513523.
Mehra, R. and Prescott, E. C. (1985) The equity premium: A puzzle. Journal of Monetary Economics 15, 145161.
Phlips, L. and Spinnewyn, F. (1982) Rationality versus myopia in dynamic demand systems, No 468, CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). https://EconPapers.repec.org/RePEc:cor:louvrp:468.
Poterba, J. M. and Rotemberg, J. J. (1987) Money in the utility function: An empirical implementation. In Barnett, W. A. and Singleton, K. J. (eds.), New Approaches to Monetary Economics, pp. 219240. Cambridge: Cambridge University Press, chapter 10.
Quirk, J. and Saposnik, R. (1968) Introduction to General Equilibrium Theory and Welfare Economics. New York: McGraw-Hill.
Rubinstein, M. (1976) The valuation of uncertain income streams and the pricing of options. Bell Journal of Economics 7, 407425.
Samuelson, P. (1948) Foundations of Economic Analysis. Cambridge, Mass: Harvard University Press.
Serletis, A. and Gogas, P. (2014) Divisia monetary aggregates, the great ratios, and classical money demand functions. Journal of Money, Credit and Banking 46 (1), 229241.
Serletis, A. and Rahman, S. (2013) The case for Divisia money targeting. Macroeconomic Dynamics 17, 16381658.
Stein, C. (1973) Estimation of the mean of a multivariate normal distribution. Proceedings of the Prague Symposium on Asymptotic Statistics, September 1973.
Telyukova, I. and Wright, R. (2008) A model of money and credit, with application to the credit card debt puzzle. Review of Economic Studies 75, 629647.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed