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Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach
Barnett, William A. Chauvet, Marcelle Tierney, Heather L. R.
Barnett, William A.
Chauvet, Marcelle
Tierney, Heather L. R.
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Abstract
This paper compares the different dynamics of the simple-sum monetary aggregates and the Divisia monetary aggregate indices over time, over the business cycle, and across high and low inflation and interest-rate phases. Although traditional comparisons of the series sometimes suggest that simple-sum and Divisia monetary aggregates share similar dynamics, there are important differences around turning points that cannot be evaluated by their average behavior. We use a factor model with a regime-switching model that separates the common movements underlying the monetary aggregate indices from idiosyncratic variations in each series. We find that the major differences between the simple-sum aggregates and Divisia indices occur around the beginnings and ends of recessions and during some high-interest-rate phases. We note the inferences' policy relevance, which is particularly dramatic at the broadest (M3) level of aggregation. Indeed, as Belongia [Journal of Political Economy, 104 (5) (1996), 1065–1083] has observed in this regard, “measurement matters.”
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This is the author's final draft of an article for which the publisher's official version is available electronically from: http://dx.doi.org/10.1017/S1365100509090166
Date
2009-09-01
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Cambridge University Press
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200706.pdf
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Keywords
Measurement error, Monetary aggregation, Divisia index, Aggregation, State space, Markov switching, Monetary policy, Index number theory, Factor models
Citation
Barnett, William. "Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach," with Marcelle Chauvet and Heather Tierney, Macroeconomic Dynamics, vol 13, Supplement 2, 2009, September, pp. 381-412. http://dx.doi.org/10.1017/S1365100509090166