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THE EXACT THEORETICAL RATIONAL EXPECTATIONS MONETARY AGGREGATE

Published online by Cambridge University Press:  01 June 2000

William A. Barnett ,
Melvin J. Hinich  and
Piyu Yue
William A. Barnett
Affiliation:
Washington University in St. Louis
Melvin J. Hinich
Affiliation:
University of Texas at Austin
Piyu Yue
Affiliation:
IC2 Institute at the University of Texas at Austin
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Abstract

In aggregation theory, index numbers are judged relative to their ability to track the exact aggregator functions nested within the economy's structure. We compare two statistical index numbers—the Divisia monetary aggregate and the simple-sum monetary aggregate—with the exact rational expectations monetary aggregate, using actual data. Because we are not using simulated data, we estimate the parameters of the Euler equations, and thereby of the nested monetary aggregator function, using the generalized method of moments. We explore the tracking errors of the two index numbers relative to the estimated exact aggregate. We investigate the circumstances under which risk aversion increases tracking error. We also use polyspectral methods to test for the existence of remaining nonlinear structure in the residual tracking errors.

Keywords

Monetary AggregationIndex Number TheorySpectral AnalysisNonlinearity
Type
Research Article
Information
Macroeconomic Dynamics , Volume 4 , Issue 2 , June 2000 , pp. 197 - 221
Copyright
© 2000 Cambridge University Press

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