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An application of index numbers theory to interest rates

Author

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  • Huerga, Javier
  • Steklacova, Lucia

Abstract

This paper uses index number theory to disentangle changes in aggregate retail interest rates due to changes in individual component rates ("interest rate effect") from those caused by changes in the weights of each component ("weight effect"), on the basis of the "difference" index numbers recently revisited by Diewert (2005). The paper, first discusses the optimal calculation of a binary index using axiomatic index number theory; on that basis, chain and direct indices are established; finally, the selected decomposition and indices are applied to monthly data on euro area interest rates on loans and deposits (MIR) for the period January 2003 - January 2008. It is concluded that relevant weight effects at euro area level are limited to a few indicators and periods of MIR, and that that the indices on interest rates can be a suitable tool in the analysis of variations in aggregate interest rates. JEL Classification: C43, E43

Suggested Citation

  • Huerga, Javier & Steklacova, Lucia, 2008. "An application of index numbers theory to interest rates," Working Paper Series 939, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2008939
    Note: 1113292
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp939.pdf
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    References listed on IDEAS

    as
    1. W. Erwin Diewert, 2002. "Harmonized Indexes of Consumer Prices: Their Conceptual Foundations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 547-637, December.
    2. G. Stuvel, 1989. "The Index-Number Problem and Its Solution," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-10816-9, December.
    3. Diewert, Erwin, 2007. "Index Numbers," Economics working papers diewert-07-01-03-08-17-23, Vancouver School of Economics, revised 31 Jan 2007.
    4. R. G. D. Allen, 1975. "Index Numbers in Theory and Practice," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-02312-7, December.
    5. repec:ubc:bricol:00-16 is not listed on IDEAS
    6. Hulten, Charles R, 1973. "Divisia Index Numbers," Econometrica, Econometric Society, vol. 41(6), pages 1017-1025, November.
    7. W. Erwin Diewert, 2005. "Index Number Theory Using Differences Rather Than Ratios," American Journal of Economics and Sociology, Wiley Blackwell, vol. 64(1), pages 311-360, January.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

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    2. Karen Poghosyan & Ruben Poghosyan, 2022. "An Application of Index Number Theory to Interest Rates: Evidence from Selected Post-Soviet Countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(2), pages 165-186.
    3. Peter Askjær Drejer, 2013. "Optimizing Checking of Statistical Reports," IFC Working Papers 11, Bank for International Settlements.

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    More about this item

    Keywords

    euro area; index numbers; interest rates;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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