Skip to main content Accessibility help
×
Home
Hostname: page-component-cf9d5c678-cnwzk Total loading time: 0.239 Render date: 2021-07-27T09:24:17.944Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }

FINANCIAL FIRM PRODUCTION OF INSIDE MONETARY AND CREDIT CARD SERVICES: AN AGGREGATION THEORETIC APPROACH

Published online by Cambridge University Press:  23 November 2018

William A. Barnett
Affiliation:
University of Kansas
Liting Su
Affiliation:
Center for Financial Stability
Corresponding
E-mail address:

Abstract

A monetary production model of financial firms is employed to investigate supply-side inside-money aggregation, augmented to include credit card transaction services. Inside money is a supply-side concept. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. We derive theory needed to measure the supply of the joint services of credit cards and inside money, needed to estimate the output supply function and to compute value added. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability in New York City.

Type
Articles
Copyright
© Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We have benefitted from constructive comments provided by Kimberley Zieschang.

References

Anderson, L. C. and Jordan, J. L. (1968) Monetary and fiscal actions: a test of their relative importance in economic stabilization. St. Louis Federal Reserve Bank Review 50(1), 1123.Google Scholar
Arrow, K. J. and Hahn, F. (1971) General Competitive Analysis. San Francisco, CA: Holden Day.Google Scholar
Barnett, W. A. (1978) The user cost of money. Economics Letter 1, 145149.Google ScholarGoogle Scholar
Barnett, W. A. (1980) Economic monetary aggregates: an application of aggregation and index number theory. Journal of Econometrics 14, 1148.Google ScholarGoogle Scholar
Barnett, W. A. (1987) The microeconomic theory of monetary aggregation. In: Barnett, W. A., and Singleton, K. (eds.), New Approaches to Monetary Economics. Cambridge: Cambridge University Press.Google ScholarGoogle Scholar
Barnett, W. A. (2012) Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy. Cambridge, MA: MIT Press.Google Scholar
Barnett, W. A. and Chauvet, M. (2011) How better monetary statistics could have signaled the financial crisis. Journal of Econometrics 161(1), 623.CrossRefGoogle Scholar
Barnett, W. A. and Hahm, J. H. (1994) Financial-firm production of monetary services: a generalized symmetric Barnett variable-profit-function approach. Journal of Business and Economic Statistics 12, 3346.Google ScholarGoogle Scholar
Barnett, W. A. and Su, L. (2016a) Joint aggregation over money and credit card services under risk. Economics Bulletin 36(4), A223A234.Google Scholar
Barnett, W. A. and Su, L. (2016b) Risk adjustment of the credit-card augmented Divisia monetary aggregates. Johns Hopkins studies in applied economics working paper No. 67. Forthcoming in De Bartolomeo, G., Federici, D., and Saltari, E. (eds.), Macroeconomic Advances in Honor of Clifford Wymer, Macroeconomic Dynamics. Forthcoming.Google Scholar
Barnett, W. A. and Su, L. (2017) Data sources for the credit-card augmented Divisia monetary aggregates. In Jawadi, F. (ed.), Banks and Risk Management, Special Issue of Research in International Business and Finance, Vol. 39, pp. 899910. Amsterdam: Elsevier. Proceedings of Second International Paris Workshop in Financial Markets and Nonlinear Dynamics.Google Scholar
Barnett, W. A. and Zhou, G. (1994) Financial firms’ production and supply-side monetary aggregation under dynamic uncertainty. Federal Reserve Bank of St. Louis Review 76, 133165.Google ScholarGoogle Scholar
Barnett, W. A., Ftiti, Z. and Jawadi, F. (2018) The Causal Relationships between Inflation and Inflation Uncertainty. University of Kansas Economics Department, Working Paper.Google Scholar
Barnett, W. A., Hinich, M. J. and Weber, W. E. (1986) The regulatory wedge between the demand-side and supply-side aggregation-theoretic monetary aggregates. Journal of Econometrics 33, 165185.CrossRefGoogle Scholar
Barnett, W. A., Kirova, M. and Pasupathy, M. (1995) Estimating policy-invariant deep parameters in the financial sector, when risk and growth matter. Journal of Money, Credit, and Banking 27, 14021430.Google ScholarGoogle Scholar
Barnett, W. A., Chauvet, M., Leiva-Leon, D. and Su, L. (2016) The Credit-Card-Services Augmented Divisia Monetary Aggregates. University of Kansas, Working Paper: No. 201604.Google Scholar
Barnett, W. A., Liu, J., Mattson, R. S. and van den Noort, J. (2013) The new CFS Divisia monetary aggregates: design, construction, and data sources. Open Economies Review 24, 101124.CrossRefGoogle Scholar
Belongia, M. T. and Chalfant, J. A. (1989) The changing empirical definition of money: some estimates from a model of the demand for money substitutes. Journal of Political Economy 97, 387-397.Google ScholarGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2015a) A ‘working’ solution to the question of nominal GDP targeting. Macroeconomic Dynamics 13(3), 508534.CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2015b). Interest rates and money in the measurement of monetary policy. Journal of Business and Economic Statistics 332, 255269.CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2016) Money and output: Friedman and Schwartz revisited. Journal of Money, Credit, and Banking 48(6), 12231266.CrossRefGoogle Scholar
Bernanke, B. S. (2013) The crisis as a classical financial panic. In: Fourteenth Jacques Polak Annual Research Conference, Board of Governors of the Federal Reserve System, Washington, DC.Google Scholar
Brunner, K. and Meltzer, A. H. (1967) The meaning of monetary indicators. In: Horwich, G. (ed.), Monetary Process and Policy. Homewood, IL: Richard Irwin.Google Scholar
Brunner, K. and Meltzer, A. H. (1990) Money supply. In: Friedman, B. M., and Hahn, F. H. (eds.), Handbook of Monetary Economics, Vol. 1. Amsterdam: Elsevier.Google Scholar
Cagan, P. (1956) Determinants and Effects of Changes in Stock of Money, 1867–1960. New York: National Bureau of Economic Research.Google Scholar
Cagan, P. (1982) The choice among monetary aggregates as targets and guides for monetary policy. Journal of Money, Credit and Banking 14(4), 661686.CrossRefGoogle Scholar
Cavalcanti, R. D. O. and Wallace, N. (1996) Inside and outside money as alternative media of exchange. Journal of Money, Credit, and Banking 931(3), 443457.Google Scholar
Chari, V. V., Christiano, L. J. and Eichenbaum, M. (1995) Inside money, outside money, and short term interest rates. Journal of Money, Credit and Banking 27(4), 13541386.CrossRefGoogle Scholar
Cherchye, L., Demuynck, T., Rock, B. D. and Hjerstrand, P. (2015) Revealed preference tests for weak separability: an integer programming approach. Journal of Econometrics 186(1), 129141.CrossRefGoogle Scholar
Crawford, G., Pavanini, N. and Schivardi, F. (2015) Asymmetric information and imperfect competition in lending markets. Centre for Economic Policy Research, CEPR Working Paper.CrossRefGoogle Scholar
Diewert, W. (1976) Exact and superlative index numbers. Journal of Econometrics 4, 115145.CrossRefGoogle Scholar
Diewert, W. E. (1980) Aggregation problems in the measurement of capital. In: Usher, D. (ed.), The Measurement of Capital. pp. 433538. Chicago: University of Chicago Press (for the NBER).Google Scholar
Feenstra, R. C. (1986) Functional equivalence between liquidity costs and the utility of money. Journal of Monetary Economics 17, 271291.CrossRefGoogle Scholar
Fisher, I. (1961). The Theory of Interest. New York: Macmillan.Google Scholar
Fischer, S. (1974) Money and the production function. Economic Inquiry 12, 517533.CrossRefGoogle Scholar
Fisher, F. M. and Shell, K. (1972) The Economic Theory of Price Indices. New York: Academic Press.Google Scholar
Fisher, F. M. and Shell, K. (2018) Economic Analysis of Production Price Indices. Cambridge, England; New York: Cambridge University Press.Google Scholar
Fixler, D. and Zieschang, K. (2016a) FISIM accounting. Centre for Efficiency and Productivity Analysis, University of Queensland, Working Paper: No. WP01/2016.Google Scholar
Fixler, D. and Zieschang, K. (2016b) Producing liquidity. Centre for Efficiency and Productivity Analysis, University of Queensland, Working Paper: No. WP02/2016.Google Scholar
Friedman, M. and Schwartz, A. J. (1963) Davi. Princeton: Princeton University Press.Google Scholar
Gurley, J. G. and Shaw, E. S. (1960) Money in a Theory of Finance. Washington, DC: Brookings Institution.Google Scholar
Hancock, D. (1991) A Theory of Production for the Financial Firm. Boston: Kluwer Academic.CrossRefGoogle Scholar
Hjertstrand, P., Swofford, J. L. and Whitney, G. (2016) Mixed integer programming revealed preference tests of utility maximization and weak separability of consumption, leisure, and money. Journal of Money, Credit, and Banking 48(7), 15471561.CrossRefGoogle Scholar
Hummel, J. R. (2015) The monetary base and total reserves: fed confusions and misreporting. Alt-M blog sponsored by the Cato Institute, November 7. https://www.alt-m.org/2015/11/07/monetary-base-total-reserves-fed-confusions-misreporting/.Google Scholar
Hummel, J. R. (2017) Central bank control over interest rates: the myth and the reality. Mercatus Center at George Mason University, Working Paper.CrossRefGoogle Scholar
Johnson, H. G. (1969) Inside money, outside money, income, wealth, and welfare in monetary theory. Journal of Money, Credit and Banking 1, 3045.CrossRefGoogle Scholar
Keating, J. W., Kelly, L. J., Smith, A. and Valcarcel, V. J. (2018) A model of monetary policy shocks for financial crises and normal conditions. Journal of Money, Credit, and Banking Forthcoming.Google Scholar
King, R. G. and Plosser, C. I. (1987) Nominal surprises, real factors, and propagation mechanisms. In: Barnett, W. A., and Singleton, K. (eds.), New Approaches to Monetary Economics, pp. 273292. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Magill, M. J. P. and Quinzii, M. (2002) Theory of Incomplete Markets. Cambridge, MA: MIT Press.Google Scholar
Magill, M. J. P. and Quinzii, M. (eds.) (2008) Incomplete Markets, Vols. 1 and 2. Cheltenham, UK: Edward Elgar.CrossRefGoogle Scholar
Meltzer, A. H. (1969) Money, intermediation, and growth. Journal of Economic Literature 7(1), 2756.Google Scholar
Pesek, B. and Saving, T. R. (1967). Money, Wealth, and Economic Theory. New York: Macmillan.Google Scholar
Phlips, L. and Spinnewyn, F. (1982) Rationality versus myopia in dynamic demand systems. In Basmann, R. L., and Rhodes, G. F. (eds.), Advances in Econometrics, pp. 333. Greenwich, CT: JAI Press.Google Scholar
Poterba, J. M. and Rotemberg, J. J. (1987) Money in the utility function: an empirical implementation. In: Barnett, W. A., and Singleton, K. J. (eds.), New Approaches to Monetary Economics, Chapter 10, pp. 219240. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Quirk, J. and Saposnik, R. (1968) Introduction to General Equilibrium Theory and Welfare Economics. New York: McGraw-Hill.Google Scholar
Rotemberg, J. J., Driscoll, J. C. and Poterba, J. M. (1995) Money, output, and prices: evidence from a new monetary aggregate. Journal of Business and Economic Statistics 13, 6783.Google Scholar
Samuelson, P. (1948) Foundations of Economic Analysis. Cambridge, MA: Harvard University Press.Google Scholar
Sato, K. (1975) Production Functions and Aggregation. Amsterdam: Elsevier.Google Scholar
Serletis, A. (1987) Monetary asset separability tests. In: Barnett, W. A., and Singleton, K. (eds.), New Approaches to Monetary Economics (1987), pp. 169182. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Serletis, A. and Gogas, P. (2014) Divisia monetary aggregates, the great ratios, and classical money demand functions. Journal of Money, Credit and Banking 46(1), 229241.CrossRefGoogle Scholar
Serletis, A. and Jadidzadeh, A. (2018) The demand for assets and optimal aggregation. Journal of Money, Credit and Banking Forthcoming.Google Scholar
Shephard, R. W. (1970) Theory of Cost and Production Functions. Princeton, NJ: Princeton University Press.Google Scholar
Sims, C. (1969) Theoretical basis for a double deflated index of real value added. Review of Economics and Statistics 51, 470471.CrossRefGoogle Scholar
Spencer, R. W. (1974) Channels of monetary influence: a survey. St. Louis Federal Reserve Bulletin, pp. 826.Google Scholar
Stiglitz, J. and Weiss, A. (1981) Credit rationing in markets with imperfect information. American Economic Review 71(3), 393410.Google Scholar
Swofford, J. L. and Whitney, G. A. (1987) Nonparametric tests of utility maximization and weak separability for consumption, leisure, and money. Review of Economics and Statistics 69, 458464.CrossRefGoogle Scholar
Swofford, J. L. and Whitney, G. A. (1994) A revealed preference test for weakly separable utility maximization with incomplete adjustments. Journal of Econometrics 60, 234249.CrossRefGoogle Scholar
Tobin, J. (1963) Commercial banks as creators of money. In: Carson, D. (ed.), Banking and Monetary Studies. Homewood, IL: Richard D. Irwin.Google Scholar
1
Cited by

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

FINANCIAL FIRM PRODUCTION OF INSIDE MONETARY AND CREDIT CARD SERVICES: AN AGGREGATION THEORETIC APPROACH
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

FINANCIAL FIRM PRODUCTION OF INSIDE MONETARY AND CREDIT CARD SERVICES: AN AGGREGATION THEORETIC APPROACH
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

FINANCIAL FIRM PRODUCTION OF INSIDE MONETARY AND CREDIT CARD SERVICES: AN AGGREGATION THEORETIC APPROACH
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *