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Consequences of Money Stock Mismeasurement: Evidence from Three Countries

In: Divisia Monetary Aggregates

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  • Michael T. Belongia

Abstract

Central banks continue to publish simple-sum measures of the money stock and draw policy inferences from their behaviour even though it has been demonstrated conclusively that these data violate basic principles of economic and index number theory. As such, any in-sample results based on simple sum data must be spurious. Furthermore, the absence of any statistical properties in these data preclude their use in making out-of-sample forecasts.1 Nonetheless, some research, which acknowledges the conceptual error of simple-sum measures, has defended their use on practical grounds.2 Generally speaking, the reasoning has been that index number theory raises some interesting and potentially important issues for the construction and use of measures of the money stock, but that measurement has turned out to be unimportant empirically in real-world applications.

Suggested Citation

  • Michael T. Belongia, 2000. "Consequences of Money Stock Mismeasurement: Evidence from Three Countries," Palgrave Macmillan Books, in: Michael T. Belongia & Jane M. Binner (ed.), Divisia Monetary Aggregates, chapter 13, pages 292-312, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-28823-2_14
    DOI: 10.1057/9780230288232_14
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    Citations

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    Cited by:

    1. Jones, Barry E. & Dutkowsky, Donald H. & Elger, Thomas, 2005. "Sweep programs and optimal monetary aggregation," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 483-508, February.
    2. Fleissig, Adrian R. & Whitney, Gerald A., 2008. "A nonparametric test of weak separability and consumer preferences," Journal of Econometrics, Elsevier, vol. 147(2), pages 275-281, December.
    3. Scharnagl, Michael, 1996. "Monetary aggregates with special reference to structural changes in the financial markets," Discussion Paper Series 1: Economic Studies 1996,02e, Deutsche Bundesbank.
    4. Binner, Jane M. & Bissoondeeal, Rakesh K. & Elger, C. Thomas & Jones, Barry E. & Mullineux, Andrew W., 2009. "Admissible monetary aggregates for the euro area," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 99-114, February.
    5. Belongia, Michael, 2005. "Where simple sum and Divisia monetary aggregates part: illustrations and evidence for the United States," MPRA Paper 18969, University Library of Munich, Germany, revised Mar 2005.
    6. Binner, Jane M. & Chaudhry, Sajid & Kelly, Logan & Swofford, James L., 2018. "“Risky” monetary aggregates for the UK and US," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 127-138.
    7. Binner, Jane & Elger, Thomas & de Peretti, Philipe, 2002. "Is UK Risky Money Weakly Separable? A Stochastic Approach," Working Papers 2002:13, Lund University, Department of Economics.
    8. Scharnagl, Michael, 1996. "Geldmengenaggregate unter Berücksichtigung struktureller Veränderungen an den Finanzmärkten," Discussion Paper Series 1: Economic Studies 1996,02, Deutsche Bundesbank.

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