The Discounted Economic Stock of Money with VAR Forecasting

William Barnett, Unja Chae and John Keating
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Unja Chae: Department of Economics, The University of Kansas

No 200515, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: We measure the United States capital stock of money implied by the Divisia monetary aggregate service flow, in a manner consistent with the present-value model of economic capital stock and asset pricing theory. The resulting measures differ substantially from the usual simple sum accounting monetary aggregates. We permit non-martingale expectations and time varying discount rates. Based on Barnett°Øs (1991) definition of the economic stock of money, we compute the U.S. economic stock of money by discounting to present value the flow of expected expenditure on the services of monetary assets, where expenditure on monetary services is evaluated at the user costs of the monetary components. As a theoretically consistent measure of money stock, our economic stock of money nests Rotemberg, Driscoll, and Poterba°Øs (1995) currency equivalent index as a special case, under the assumption of martingale expectations. To compute the economic stock of money without imposing martingale expectations, we use forecasts based on the asymmetric vector autoregressive model and the Bayesian vector autoregressive model. We find the resulting capital-stock growth-rate index to be surprisingly robust to the modeling of expectations. Accurate measurement of the economic capital stock of money is relevant to understanding the wealth effects and transmission mechanism of monetary policy.

Keywords: Monetary aggregation; Divisia money aggregate; economic stock of money; user cost of money; currency equivalent index; Bayesian vector autoregression; asymmetric vector; autoregression. (search for similar items in EconPapers)
JEL-codes: C43 E4 E5 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2005-08, Revised 2005-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Chapter: The Discounted Economic Stock of Money with VAR Forecasting (2011)
Journal Article: The Discounted Economic Stock of Money with VAR Forecasting (2006)
Working Paper: The discounted economic stock of money with VAR forecasting (2006)
Working Paper: The Discounted Economic Stock of Money with VAR Forecasting (2005)
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