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RISK ADJUSTMENT OF THE CREDIT-CARD AUGMENTED DIVISIA MONETARY AGGREGATES

Published online by Cambridge University Press:  06 June 2018

William A. Barnett  and
Liting Su
William A. Barnett
Affiliation:
University of Kansas
Liting Su*
Affiliation:
University of Kansas
*
Address correspondence to: Liting Su, Center for Financial Stability, NY City, 1120 Avenue of Americas, 4th Floor, New York, NY 10036, USA; e-mail: lsu@the-cfs.org
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Abstract

While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. Barnett et al. derived the aggregation and index number theory needed to measure the joint services of credit cards and money. They derived and applied the theory under the assumption of risk neutrality. But since credit card interest rates are high and volatile, risk aversion may not be negligible. We extend the theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer.

Keywords

Credit CardsMonetary AggregationIndex Number TheoryDivisia IndexRiskEuler EquationsAsset Pricing
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Special Issue S1: Special Issue in Honor of Clifford Wymer on Developments in Macroeconomics , September 2019 , pp. 90 - 114
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

William A. Barnett is the Oswald Distinguished Professor of Macroeconomics at the University of Kansas. He is Director of the Center for Financial Stability in New York City and Director of the Institute for Nonlinear Dynamical Inference in Moscow. He is Editor of the Cambridge University Press journal, Macroeconomic Dynamics, and the Emerald Press monograph series, International Symposia in Economic Theory and Econometrics. He is author of the book Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy, MIT Press. The book won the American Publishers Award for Professional and Scholarly Excellence for the best book published in economics during 2012. With Nobel Laureate Paul Samuelson, he also coauthored the book, Inside the Economist's Mind, translated into seven languages. He is founder and President of the Society for Economic Measurement.

Liting Su holds degrees from the University of Kansas and Renmin University of China. She is a Research Associate specializing in aggregation-theoretic monetary aggregation for the Center for Financial Stability's program, Advances in Monetary and Financial Measurement. She has been contributing to the construction of the Augmented Divisia Monetary Aggregates for the United States under the direction of CFS Director Dr. William A. Barnett. Her current research focuses on incorporating credit card services into the CFS Divisia monetary aggregates to produce the Augmented Divisia Monetary Aggregates.

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