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Risk Adjustment of the Credit-Card Augmented Divisia Monetary Aggregates

William Barnett () and Liting Su
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Liting Su: Department of Economics, The University of Kansas;

No 201606, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) derived the aggregation and index number theory needed to measure the joint services of credit cards and money. They derived and applied the theory under the assumption of risk neutrality. But since credit card interest rates are high and volatile, risk aversion may not be negligible. We extend the theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer.

Keywords: Credit Cards; Money; Credit; Aggregation; Monetary Aggregation; Index Number Theory; Divisia Index; Risk; Euler Equations; Asset Pricing (search for similar items in EconPapers)
JEL-codes: C43 C53 C58 E01 E3 E40 E41 E51 E52 E58 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2016-08, Revised 2016-08
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