Nonseparability of Credit Card Services within Divisia Monetary Aggregates

William Barnett and Hyun Park
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Hyun Park: Department of Economics, Valparaiso University, Valparaiso, IN 46383, USA

No 202408, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: We use the New-Keynesian DSGE framework and VAR to investigate the usefulness and relevancy of monetary services, augmented to include credit card transaction services. We use the new credit-card-augmented Divisia monetary aggregates in the models to further the existing research on their usefulness and relevancy. In this research, we compare three different monetary aggregates within the New-Keynesian framework: (1) the aggregation theoretic "true" monetary aggregate, (2) the credit-card-augmented Divisia monetary aggregate, and (3) the simple sum monetary aggregate. We acquire the following primary results. (1) The credit-card-augmented Divisia monetary aggregate tracks the theoretical (true) monetary aggregate, while simple-sum does not. Although this result would be expected from the theory in classical economic models, the result is not an immediate implication of the theory in New-Keynesian models and therefore needs empirical confirmation. (2) Under the recursive VAR framework, the credit-card-augmented Divisia monetary aggregate serves as a preferable monetary policy indicator compared to the traditional federal funds rate. (3) On theoretical grounds, we find that the separability condition for existence of a monetary aggregator function could fail, if credit card deferred payment services were excluded from the monetary services block, unless all markets are perfect.

Keywords: Credit-card-augmented Divisia monetary aggregates; New-Keynesian DSGE; credit card services; VAR. (search for similar items in EconPapers)
JEL-codes: E12 E41 E51 E52 E58 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mon and nep-pay
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Journal Article: Nonseparability of credit card services within Divisia monetary aggregates (2025)
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