Essays on Divisia Monetary Aggregates and Global Monetary Policies: Evidence from the United States and China

Abstract

The Divisia Monetary Aggregate Index was based on aggregation theory in microeconomics and index theory in statistics. It has a solid theoretical foundation and is generally recognized by the academy as the monetary aggregation model that is superior to the simple sum aggregation. It has been gradually adopted by central banks of various countries. However, under the background of the continuous deepening of financial innovation, the existing index can no longer meet the requirements for the measurement of new monetary assets. With the booming of e-commerce and online shopping, e-commerce consumption loans that includes the hottest buy-now-later service provided by non-banking financial institutions, are playing a more important role than ever. However, these transaction services have never been included in the measures of monetary aggregation. This paper derives a consumption loan augmented monetary aggregates that based on aggregation theory and discusses aggregates for even broader liquid assets. By applying the model with China’s data, the consumption loan augmented Divisia Aggregation shows its unique correlation with the economy. A further spectrum analysis illustrates the periodic patterns between monetary aggregation and nominal GDP, which also verify the external validity of the model. Money supply of the United States is the main intermediary target of macro-control which matters to both domestic and worldwide. Divisia Monetary Aggregates have proved to be preferable to the conventional simple sum aggregates in many ways. This paper empirically compared periodic characteristics of different monetary aggregates of the United States by solving the inherit measurement issues with analysis methods in frequency domain. In particular, I have reorganized and visualized related spectrum analysis results including their coherencies and phase differences with major economic policy targets in the short term and long term, in order to suggest a potential optimal intermediary target for macroeconomic regulation with different control period requirements. Chapter 3 compares the monetary aggregates of the two world’s giants: The United States and China, with the spectrum analysis methods in frequency domain. By deriving the binary spectrum analysis results between monetary aggregates and nominal GDP for both countries, I analyze the periodic pattern in both short runs and long runs of the published simple sum monetary aggregates and the advanced Divisia Monetary Aggregates, including their coherencies and synchronization relationships with GDP of the two countries. Furthermore, we conclude the periodic patterns of all monetary aggregates for each country and provide the possible explanations of the difference in the in two countries’ monetary policies. Our results also provide empirical evidence of classic monetary theories and views. We evaluate the treatment effect of interest-rate liberalization in China with the difference-in-difference (DID) model. DID model has been used in econometrics to quantitatively evaluate the effect of public policy or project implementation by solving the non-random sample allocation for the policy implementation group and the control group. However, the unique interest rate liberalization in China makes it impossible to find related panel data. In Chapter 4, we will solve this problem by involves Divisia Monetary Aggregation and restate the time series data and evaluate policy reforms of China’s recent Interest Rate Liberalization.