The Exact Theoretical Rational Expectations Monetary Aggregate

William Barnett, Melvin Hinich and Piyu Yue
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Piyu Yue: IC2 Institute at the University of Texas at Austin

No 201229, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: In aggregation theory, index numbers are judged relative to their ability to track the exact aggregator functions nested within the economyís structure. Within the monetary sector, Barnett, Liu, and Jensen (1997) compared two statistical index numbers: the Divisia monetary aggregate and the simple sum monetary aggregate. They produced those comparisons using simulated data. In this paper, we again compare those two statistical index numbers with the exact rational expectations monetary aggregate, but we use actual data. Since we are not using simulated data, we estimate the parameters of the Euler equations and thereby of the nested monetary aggregator function using generalized method of moments. We explore the tracking errors of the two index numbers relative to the estimated exact aggregate. We investigate the circumstances under which risk aversion increases tracking error. We also use polyspectral methods to test for the existence of remaining nonlinear structure in the residual tracking errors.

Keywords: Monetary aggregation; index number theory; spectral analysis; nonlinearity (search for similar items in EconPapers)
Pages: 48 pages
Date: 2012-09, Revised 2012-09
New Economics Papers: this item is included in nep-mon and nep-upt
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Related works:
Chapter: The Exact Theoretical Rational Expectations Monetary Aggregate (2011)
Journal Article: THE EXACT THEORETICAL RATIONAL EXPECTATIONS MONETARY AGGREGATE (2000)
Working Paper: The Exact Theoretical Rational Expectations Monetary Aggregate (2000)
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