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Barnett Critique After 4-Decades: Importance of Correct Measurement Tool
Park, Hyun
Park, Hyun
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Abstract
The purpose of this paper is to estimate the relationship among the set of economic variables including two types of monetary aggregates; M2 level of simple sum and credit-card-augmented Divisia monetary aggregates inside money. The data period includes the Great Recession. The basic methodology in this paper is VAR-Sign Restriction estimation. VAR is a powerful and intuitive method to analyze inter-dependency among economic variables. By applying VAR-Sign Restriction, we analyze how economic variables behave (positively or negatively) toward differently defined shocks. Imposing plus/minus signs to the direction of economic variables is based on economic (prior) belief. The use of Bayesian estimation helps to build the model structure. Imposing prior belief helps to clarify the behavior of credit-card-augmented Divisia monetary aggregate toward various shocks, especially credit supply shock. The purpose of this paper is to investigate the New-Keynesian DSGE framework and VAR estimation that extends the perspective of monetary, liquidity service providers to credit card transactions. We introduce a new monetary aggregate, credit-card-augmented Divisia monetary aggregate into the models, which points out the role of a liquidity service provider is conducted through currency, deposit, and credit cards transactions. To justify the availability of credit-card-augmented Divisia monetary aggregate, we introduce three different monetary aggregates into the New-Keynesian framework: 1) theoretical (true) monetary aggregate, 2) credit-card-augmented Divisia monetary aggregate, 3) simple sum monetary aggregate, and interpret the impulse responses to each monetary variable by imposing various shocks. The study delivers the following results: First, the result shows that a credit-card-augmented Divisia aggregate of monetary services tracks the theoretical (true) monetary aggregate precisely, however, a simple-sum one does not. Second, under the empirical recursive VAR approach, we find that the credit-card-augmented Divisia monetary aggregate serves as an appropriate monetary policy indicator compared to the traditional federal funds rate. In short, we conclude that the "Barnett Critique" is still applicable, and the liquidity service provided by credit cards transactions should be considered actively in economic analysis. Fed discontinued announcing broader monetary aggregate. For example, M3 was discontinued to publish in 2006 and only M3 data set borrowed from OECD has been displayed. Moreover, we cannot track M4 data series in FRED anymore. Although the importance of monetary aggregate is increasing (as a tool of understanding monetary transmission mechanism), researchers cannot approach a reliable data set. As we see in the Divisia data provided by the Center for Financial Stability (CFS), many economic events can be tracked by the broader money rather than the narrow money. Clearly, there would be an economic implication provided by the broader monetary aggregate. The purpose of this paper is to examine the availability of Divisia-type monetary aggregates for all ranges by conducting several tests. Following the philosophy of Bernanke and Blinder (1992) and Belongia and Ireland (2015), we test the causal relationship between real economic variables and monetary aggregates. We also set up a basic recursive VAR, and Leeper and Roush (2013) type non-recursive VAR model, and study the economic implications given by the results.
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2022-08-31
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University of Kansas
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Economics, Macroeconomics, Monetary Aggregation, New-Keynesian DSGE, Time Series Analysis