Divisia monetary aggregates

Divisia monetary aggregates

The monetary aggregates currently in use by the Federal Reserve (and most other central banks around the world) are simple-sum indices in which all monetary components are assigned a unitary weight, as follows


where x_{jt} is one of the n monetary components of the monetary aggregate M_{t}. This summation index implies that all monetary components contribute equally to the money total and it views all components as dollar for dollar perfect substitutes. Such an index, however cannot, in general, represent a valid structural economic variable for the services of the quantity of money.

Over the years, there have been many attempts at properly weighting monetary components within a simple-sum aggregate. With no theory, however, any weighting scheme is questionable. Recently, however, attention has beenfocused on the gains that can be achieved by a rigorous use of microeconomic- and aggregation-theoretic foundations in the construction of monetary aggregates. This new approach to monetary aggregation was derived and advocated by William A. Barnett (1980) and has led to the construction of monetary aggregates based on Diewert's (1976) class of superlative quantity index numbers. The new aggregates are called the Divisia aggregates or Monetary Services Indexes. Early research with those aggregates using American data was done by Salam Fayyad.

The Divisia index (in discrete time) is defined as

log M_{t}^{D}-log M_{t-1}^{D}=sum_{j=1}^{n}s_{jt}^{*}(log x_{jt}-log x_{j,t-1})

according to which the growth rate of the aggregate is the weighted average of the growth rates of the component quantities. The original continuous time Divisia index was derived by Francois Divisia in his classic paper published in French in 1925 in the "Revue d'Economie Politique". The discrete time Divisia weights are defined as the expenditure shares averaged over the two periods of the change


for j=1,..., n, where

s_{jt}=frac{pi _{jt}x_{jt{sum_{k=1}^{n}pi _{kt}x_{kt

is the expenditure share of asset j during period t, and pi _{jt} is the user cost of asset j, derived in Banett (1978),

pi _{jt}=frac{(R_{t}-r_{jt})}{(1+R_{t})}

which is just the opportunity cost of holding a dollar's worth of the jth asset. In the last equation, r_{jt} is the market yield on the jth asset, and R_{t} is the yield available on a 'benchmark' asset that is held only to carry wealth between multiperiods.

The Divisia approach to monetary aggregation represents a viable and theoretically appropriate alternative to the simple-sum approach, which is unfortunately still in use by some central banks. Barnett, Fisher, and Serletis (1992), Barnett and Serletis (2000), and Serletis (2007) provide more details regarding the Divisia approach to monetary aggregation. Divisia Monetary Aggregates are available for the United Kingdom by the [http://www.bankofengland.co.uk/statistics/ms/current/index.htm Bank of England] and for the United States by the [http://research.stlouisfed.org/msi/index.html Federal Reserve Bank of St. Louis] .


* [http://econ.tepper.cmu.edu/barnett/Welcome.html Barnett, William A.] "The User Cost of Money". "Economics Letters" (1978), 145-149.

* Barnett, William A. "Economic Monetary Aggregates: An Application of Aggregation and Index Number Theory", "Journal of Econometrics" 14 (1980), 11-48.

* Barnett, William A. and Apostolos Serletis. "The Theory of Monetary Aggregation". Contributions to Economic Analysis 245. Amsterdam: North-Holland (2000).

* Barnett, William A., Douglas Fisher, and Apostolos Serletis. "Consumer Theory and the Demand for Money". "Journal of Economic Literature" 30 (1992), 2086-2119.

* [http://www.econ.ubc.ca/diewert/hmpgdie.htm Diewert, W. Erwin.] "Exact and Superlative Index Numbers". "Journal of Econometrics" 4 (1976), 115-146.

* [http://econ.ucalgary.ca/serletis.htm Serletis, Apostolos.] "The Demand for Money: Theoretical and Empirical Approaches". Springer (2007).

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Divisia monetary aggregates index — In econometrics and official statistics, and particularly in banking, the Divisia monetary aggregates index is an index of money supply. It is a particular application of a Divisia index to monetary aggregates. Background The monetary aggregates… …   Wikipedia

  • Divisia index — A Divisia index is a theoretical construct to create index number series for continuous time data on prices and quantities of goods exchanged. It is designed to incorporate quantity and price changes over time from subcomponents which are… …   Wikipedia

  • François Divisia — François Divisia, né en 1889 à Tizi Ouzou et mort le 6 février 1964 à Paris, est un économiste français. Sommaire 1 Biographie 2 Œuvres 3 Bibliographie …   Wikipédia en Français

  • William A. Barnett — William Arnold Barnett is an American economist whose current work is in the field of chaos, bifurcation, and nonlinearity in socioeconomic contexts, as well as the study of the aggregation problem.Barnett received his B.S. degree from M.I.T.,… …   Wikipedia

  • Salam Fayyad — infobox Prime Minister name = Salam Fayyad سلام فياض honorific suffix = MBA PhD caption = Fayyad with Israeli Foreign Minister Tzipi Livni at the World Economic Forum in Davos, 2008 order = Prime Minister of Palestine president = Mahmoud Abbas… …   Wikipedia

  • Federal Reserve Bank of St Louis — The Federal Reserve Bank of St. Louis is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., make up the nation s central bank. Missouri is the only state to have two Federal Reserve Banks (Kansas City… …   Wikipedia