Measurement of the Credit Card Augmented Monetary Service Flows in the Economy

Abstract

Under accounting conventions, monetary assets cannot be added to liabilities, for example, credit card balances, which are liabilities to consumers. However, from an innovative perspective proposed by Professor William A. Barnett, we perceive credit cards as transaction service providers, along with monetary assets, such as currency and demand deposit. Microeconomic aggregation theory and index number theory measure service flows and thereby provide a theoretical basis to aggregate jointly over credit card services and monetary services to produce our new Augmented Divisia Monetary Aggregates. Whether services are produced by assets or liabilities is not relevant to aggregation theory. Following this micro-theoretic approach, my dissertation is organized in the following manners: Chapter 1 documents detailed information on the data sources used in producing the new augmented Divisia monetary aggregates, together with other relevant sources that we extensively explored for availability of the needed credit card variables. Chapter 2 contains the theoretical derivation needed to measure the joint services of credit cards and money. We provide and evaluate two such aggregate measures, having different objectives. We initially apply our new aggregates to NGDP nowcasting. Both aggregates are being implemented by the Center for Financial Stability, which will provide them to the public through monthly releases, as well as to Bloomberg Terminal users. Chapter 3 extends the above theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer. Chapter 4 investigates bivariate time series properties of Divisia money and nominal GDP to investigate the viability of recent proposals by authors who have advocated a role for a Divisia monetary aggregate in nominal GDP targeting. Chapter 5 provides theory needed to measure the supply of the joint services of credit cards and money by financial firms. The resulting model can be used to investigate the transmission mechanism of monetary policy and to measure inside money and value-added produced by banks. This measurement could also be helpful to economists working on the national accounts as well as to those investigating the growing role of shadow banking.