11 - Comment on papers in Part III

Summary

Barnett's paper

In Part III of this volume, Barnett's paper (Chapter 6) brings together all of the currently available aggregation and index number theory relevant to monetary aggregation under perfect certainty. That theory includes demand side aggregation theory – which deals with aggregation over monetary assets when the aggregator functions are weakly separable input blocks in production functions or in utility functions – and supply side aggregation theory, which deals with aggregation over monetary assets when the aggregator functions are weakly separable output blocks in the transformation functions of multiproduct financial intermediaries. The theory also deals with aggregation over firms and consumers, technical change, and value added in financial intermediation. However, when uncertainty exists, the theory presented in Barnett's paper assumes risk neutrality. In that case all economic agents can be viewed as solving decision problems in a perfect-certainty form, with all random variables replaced by their expectations. In other words, a form of certainty equivalence is assumed.

Poterba and Rotemberg's paper

The risk neutrality assumption produces tremendous simplification and provides access to all of the existing literature on aggregation and index number theory. Nevertheless, if firms and consumers are very risk-averse, a more general approach to modeling uncertainty could be preferable. The Poterba and Rotemberg paper (Chapter 10) seeks to tackle that difficult problem through the use of the expected utility approach to modeling decisions under uncertainty.