This paper develops a new utility-based monetary aggregate which we label the currency equivalent aggregate. This aggregate equals the stock of currency that would be required for households to obtain the same liquidity services that they get from their entire collection of monetary assets. We compare the ability of the new aggregate and conventional aggregates, such as Ml and M2, and other indicators of monetary policy to forecast real activity. The CE aggregate has more predictive power for output and prices than standard aggregates, and the time path of the estimated output response is more consistent with broad classes of theoretical models.
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Excerpt from Money, Output, and Prices Evidence From a New Monetary Aggregate How monetary shocks affect prices and real activity are two of the central questions in macroeconomics. The implications of various theoretical models addressing these issues have been explored in literally hundreds of empirical papers. Despite the substantial interest in what money does, there is little consensus on what money is. Most previous empirical studies use relatively arbitrary rules in deciding which assets are monetary, and which are not. By choosing to study how the monetary base, or M1, or M2, affects prices and real activity, researchers implicitly made judgments about the identity of monetary assets. Narrow definitions of money, such as the base, exclude a variety of assets that provide liquidity services. Broader definitions, such as M2, give equal weight to a variety of assets with arguably quite different liquidities. This is hardly more defensible than constructing a measure of GNP by adding together the physical volume of output in different industries! A more attractive approach involves weighting different assets by the value of the monetary services they provide. This principle underlies Barnett's(1980) derivation of Divisia monetary aggregates. The continued widespread use of conventional aggregates is particularly surprising, since research has repeatedly shown Divisia aggregates to be at least as good at predicting GNP. In this paper we propose a new monetary aggregate, the currency-equivalent (CE) aggregate, which is related to the Divisia aggregates. The CE aggregate is a time-varying weighted average of the stocks of different monetary assets, with weights which depend on each asset's yield relative to that on a benchmark "zero liquidity" asset. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.com This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.
Excerpt from Money, Output, and Prices Evidence From a New Monetary Aggregate Some assets can readily be used for transactions. Individuals pay for the liquidity that these assets offer by foregoing the higher expected returns that are available on other, less liquid assets. Holding one dollar in currency costs more than holding one dollar in a now account, and it presumably generates greater liquidity services. We formalize this idea by assuming that individuals derive utility from holding certain assets. Our results could also be obtained by assuming that individuals and firms incur transactions costs which depend negatively on asset-holdings and positively on the volume of transactions. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.com This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.
The leading researchers from central banks and universities around the world debate issues central to the performance of Divisia monetary aggregates both in theory and in practice. The overall conclusion is that Divisia monetary aggregates outperform their simple sum counterparts in a wide range of applications the world over. The book is the first volume-length study of empirical data and theoretical research on the subject.
While there is ample evidence that high inflation is harmful, little is known about how best to reduce inflation or how far it should be reduced. In this volume, sixteen distinguished economists analyze the appropriateness of low inflation as a goal for monetary policy and discuss possible strategies for reducing inflation. Section I discusses the consequences of inflation. These papers analyze inflation's impact on the tax system, labor market flexibility, equilibrium unemployment, and the public's sense of well-being. Section II considers the obstacles facing central bankers in achieving low inflation. These papers study the precision of estimates of equilibrium unemployment, the sources of the high inflation of the 1970s, and the use of non-traditional indicators in policy formation. The papers in section III consider how institutions can be designed to promote successful monetary policy, and the importance of institutions to the performance of policy in the United States, Germany, and other countries. This timely volume should be read by anyone who studies or conducts monetary policy.
Parts three and four are devoted to algebraic and combinatorial aspects of social choice theory, including analyses of Arrow's Theorem, consensus functions, and the role of geometry. Part five deals with the application of cooperative game theory to social choice.
Aggregate cost uncertainty, arising from real shocks or unanticipated inflation, reduces the informativeness of prices by scrambling relative and aggregate variations. But when agents can acquire additional information, such increased noise may in fact lead them to become better informed, and price competition will intensify. We examine these issues in a model of search with learning, where consumers search optimally from an unknown price distribution while firms price optimally given consumers' search rules. We show that the decisive factor in whether inflation variability increases or reduces the incentive to search, and thereby market efficiency, is the size of informational costs.
