MEASUREMENT ERROR IN MONETARY AGGREGATES: A MARKOV SWITCHING FACTOR APPROACH

William Barnett (), Marcelle Chauvet () and Heather L.R. Tierney ()

Macroeconomic Dynamics, 2009, vol. 13, issue S2, pages 381-412

Abstract: This paper compares the different dynamics of the simple-sum monetary aggregates and the Divisia monetary aggregate indices over time, over the business cycle, and across high and low inflation and interest-rate phases. Although traditional comparisons of the series sometimes suggest that simple-sum and Divisia monetary aggregates share similar dynamics, there are important differences around turning points that cannot be evaluated by their average behavior. We use a factor model with a regime-switching model that separates the common movements underlying the monetary aggregate indices from idiosyncratic variations in each series. We find that the major differences between the simple-sum aggregates and Divisia indices occur around the beginnings and ends of recessions and during some high-interest-rate phases. We note the inferences' policy relevance, which is particularly dramatic at the broadest (M3) level of aggregation. Indeed, as Belongia [Journal of Political Economy, 104 (5) (1996), 1065 measurement matters.

Date: 2009
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Related works:
Working Paper: Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach (2008)
Working Paper: Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach (2008)
Working Paper: Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach (2008)
Working Paper: Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach (2007)
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