Modern and Traditional Methods for Measuring Money Supply: The Case of Saudi Arabia

William Barnett,Ryadh Alkhareif

doi:10.3390/ijfs3010049

Abstract

This paper compares the “simple-sum” monetary aggregates (M1 and M2) published by the Saudi Arabian Monetary Agency (SAMA) with the new monetary aggregates (D1 and D2)—known as the Divisia monetary indexes. The former aggregates are constructed from a simple accounting identity, whereas the Divisia aggregates are constructed using statistical index number theory and aggregation theory. The findings suggest that both D1 and M1 are identical, given the perfect substitutability of the monetary components within those aggregates. For the broader monetary aggregates where perfect substitutability assumption is not realistic, the two monetary indexes differ substantially. SAMA could benefit by using both monetary indexes simultaneously to better monitor liquidity in the market.

Highlights

Simple-sum monetary aggregates are commonly used by central banks worldwide
The remainder of this paper is organized as follows: Section 2 provides a brief overview of the theoretical background relating to monetary aggregation and statistical index numbers, Section 3 describes the data used in this paper, Section 4 constructs Divisia monetary aggregates for Saudi Arabia, and Section 5 concludes the paper
The findings suggest a high correlation between the two approaches of aggregation only for the narrow monetary aggregates, as perfect substitutability among components within these aggregates hold

Summary

Introduction

Simple-sum monetary aggregates (widely denoted by M1, M2, and M3) are commonly used by central banks worldwide. The seminal work of Barnett [1,2,7] derived the Jorgensonian user cost of monetary assets from a rigorous Fisherine intertemporal consumption expenditure allocation model His findings have inaugurated the use of index number theory into monetary economics. By weighting the monetary components, a Divisia Money formulation takes account of the trade-off between the medium-of-exchange and store-of-value functions of holding of money components.” Such support from the IMF is understandable, given the fact that Divisia monetary aggregates for a number of countries have been shown to have more robust relationships with major macroeconomic variables than have the traditional simple sum aggregates (see, e.g., Serletis and Gogas [8]). The remainder of this paper is organized as follows: Section 2 provides a brief overview of the theoretical background relating to monetary aggregation and statistical index numbers, Section 3 describes the data used in this paper, Section 4 constructs Divisia monetary aggregates for Saudi Arabia, and Section 5 concludes the paper

Monetary Aggregation Theory and Statistical Index Numbers

Data Descriptions and Sources

Constructing New Monetary Aggregates for Saudi Arabia

Findings

Conclusions