Abstract
Since Barnett derived the user cost price of money, the economic theory of monetary services aggregation has been developed and extended into a field of its own with solid foundations in microeconomic theory. Divisia monetary aggregates have repeatedly been shown to be strictly preferable to their simple sum counterparts, which have no competent foundations in microeconomic aggregation or index number theory. However, most central banks in the world, including that of Singapore, the Monetary Authority of Singapore (MAS), still report their monetary aggregates as simple summations. Recent macroeconomic research about Singapore tends to focus on exchange rates as a monetary policy target but ignores the aggregate quantity of money. Is that because quantities of money are irrelevant to economic activity? To examine the role of monetary quantities as potential monetary instruments, indicators, or targets and their relevance to predicting real economic activity in Singapore, this paper applies the user cost of money formula and the recently developed credit-card-augmented Divisia monetary aggregates formula to construct monetary services indexes for Singapore. We produce those state-of-the-art monetary services indexes from Jan 1991 to Mar 2021. We see that Divisia measures behave differently from simple sum measures in the period before the year 2000, while interest rates were high. Credit-card-augmented Divisia monetary services move closely with the conventional Divisia monetary aggregates, since the volume of credit card transactions in Singapore is relatively small compared with other monetary service assets. In future work, we plan to use our data to explore central bank policy in Singapore and to propose improvements in that policy. By making our data available to the public, we encourage others to do the same.
Highlights
Since Irving Fisher (1922) published his classic book, The Making of Index Numbers, statistical indexes have been extensively applied in economic measurement
Our credit-card-augmented Divisia indexes are computed by incorporating credit card transactions into each level of aggregation we report DM1a, DM2a, DM3a, and Treasury Bills
Aggregation theory and index number theory have been extensively applied in economic measurement fortheory more than aindex century, monetary aggregation theory has aggregation and number theory have extensively apAlthough aggregation theory and index number theory have been been extensively apappeared and been applied more recently
Summary
Since Irving Fisher (1922) published his classic book, The Making of Index Numbers, statistical indexes have been extensively applied in economic measurement. Widely used in economic measurement since the appearance of Fisher’s book, statistical index theory has not been applied in financial and monetary aggregation until recent decades. Up until the 1980s, economists throughout the world measured different levels of monetary aggregation, such as M0/MB (monetary base), M1 (narrow money), M2 (broad money), and M3 and M4 (financial liquidity), by adding up the quantities of component assets. Simple summation assigns the same weights to different monetary assets and thereby implicitly assumes that all monetary assets are perfect substitutes. In which monetary assets possess different levels of liquidity and yield different interest rates, simple sum measures are misleading and can damage inferences about economic behavior and the economy. Crystal and MacDonald (1994) coined the well-known term “Barnett critique” to designate the resulting distortions of economic inferences
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