The Exact Theoretical Rational Expectations Monetary Aggregate

William Barnett (), Melvin J. Hinich () and Piyu Yue
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Piyu Yue: IC2 Institute at the U. of Texas at Austin

Macroeconomics from EconWPA

Abstract: In aggregation theory, index numbers are judged relative to their ability to track the exact aggregator functions nested within the economy's 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)
JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Note: Type of Document - word doc, pdf and ps; prepared on Win 95; pages: 46 ; figures included.
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