International Financial Aggregation and Index Number Theory: A Chronological Half-century Empirical Overview |
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Authors: | William A Barnett Marcelle Chauvet |
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Institution: | (1) University of Kansas, Lawrence, KS, USA;(2) University of California at Riverside, Riverside, CA, USA |
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Abstract: | This paper comprises a survey of a half century of research on international monetary aggregate data. We argue that since
monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and
have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have
contaminated research in monetary economics, have resulted in needless “paradoxes,” and have produced decades of misunderstandings
in international monetary economics research and policy. While better data, based correctly on index number theory and aggregation
theory, now exist, the official central bank data most commonly used have not improved in most parts of the world. While aggregation
theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central
banks throughout the world, the only central banks that currently make aggregation theoretic monetary aggregates available
to the public are the Bank of England and the St. Louis Federal Reserve Bank. No other area of economics has been so seriously
damaged by data unrelated to valid index number and aggregation theory. In this paper we chronologically review the past research
in this area and connect the data errors with the resulting policy and inference errors. Future research on monetary aggregation
and policy can most advantageously focus on extensions to exchange rate risk and its implications for multilateral aggregation
over monetary asset portfolios containing assets denominated in more than one currency. The relevant theory for multilateral
aggregation with exchange rate risk has been derived by Barnett (J Econom 136(2):457–482, 2007) and Barnett and Wu (Ann Finance 1:35–50, 2005).
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Keywords: | Measurement error Monetary aggregation Divisia index Aggregation Monetary policy Index number theory Exchange rate risk Multilateral aggregation Open economy monetary economics |
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