Nonseparability of Credit Card Services within Divisia Monetary Aggregates

We use the New-Keynesian DSGE framework and VAR to investigate the usefulness and relevancy of monetary services, augmented to include credit card transaction services. We use the new credit-card-augmented Divisia monetary aggregates in the models to further the existing research on their usefulness and relevancy. In this research, we compare three different monetary aggregates within the New-Keynesian framework: (1) the aggregation theoretic "true" monetary aggregate, (2) the credit-card-augmented Divisia monetary aggregate, and (3) the simple sum monetary aggregate. We acquire the following primary results. (1) The credit-card-augmented Divisia monetary aggregate tracks the theoretical (true) monetary aggregate, while simple-sum does not. Although this result would be expected from the theory in classical economic models, the result is not an immediate implication of the theory in New-Keynesian models and therefore needs empirical confirmation. (2) Under the recursive VAR framework, the credit-card-augmented Divisia monetary aggregate serves as a preferable monetary policy indicator compared to the traditional federal funds rate. (3) On theoretical grounds, we find that the separability condition for existence of a monetary aggregator function could fail, if credit card deferred payment services were excluded from the monetary services block, unless all markets are perfect.