The Exact Theoretical Rational Expectations Monetary Aggregate

William Barnett, Melvin Hinich and Piyu Yue

Chapter 2 in Financial Aggregation and Index Number Theory, 2011, pp 53-84 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn 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: Index Number Theory; Aggregation Theory; Money; Financial Assets; Monetary Aggregates (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: The Exact Theoretical Rational Expectations Monetary Aggregate (2012)
Journal Article: THE EXACT THEORETICAL RATIONAL EXPECTATIONS MONETARY AGGREGATE (2000)
Working Paper: The Exact Theoretical Rational Expectations Monetary Aggregate (2000)
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