url
17
Jan
2014

Empirical Performance of Monetary Aggregates in BEAC and BCEAO: The Relative Performance

According to microeconomic demand theory, if indeed these assets were perfect substitutes, rational economic agents would choose to hold only one asset class unless all assets have the same user cost. However, there is sufficient evidence on differences in user costs and on imperfect substitution between components of monetary aggregates. Divisia monetary aggregates were introduced by the seminal work of Barnett to overcome the theoretical deficiencies of traditional monetary aggregates. Barnett constructs monetary aggregates, which take into account the degree of monetarity of different monetary assets with a rigorous application of theories of aggregation and index numbers. Hence, Divisia index is theoretically the most relevant in the sense that it is constructed with solid theoretical foundations. Credit card

On the empirical ground, the following evidences can be drawn from monetary policy perspectives. Since the 1990’s, BEAC and BCEAO were engaged in some important financial reforms. These reforms introduced the liberalization of interest rates and the removal of credit ceilings which are ingredients for financial innovations. Generally, financial innovations lead to substantial changes in the behavior of monetary aggregates, in terms of their capacity to predict price level and GDP. In addition, we observe that the volume of demand deposits (DDBEAC) and quasi money (QMBEAC) increases more than the quantity of fiduciary money (MFBEAC) in BEAC; and in BCEAO furthermore, there is no substantial change in the evolution of components of monetary aggregates over the period (see figures 1 and 2). Especially for BEAC, this evidence suggests an increasing proportion of monetary components which have a positive implicit or explicit rate of return. Then, take into account the evolution of Divisia monetary aggregates make sense. The purpose of the paper is therefore to provide empirical evidence by comparing the performance of the simple sum and Divisia monetary aggregates. This evidence will come from a comparison of the relative performance of alternative aggregates in terms of growth captured by real GDP, and inflation captured by consumer price index within the period 1992.1- 2007.4 Two approaches are used in the paper. The first approach uses variance decomposition in an in-sample forecasting perspective. In the second approach, the forecasting exercise will be one of true out-of sample forecasting.
The paper is organized as follow. Section 2 provides a brief review of literature of the empirical performances of Divisia monetary aggregates versus simple sum monetary aggregates. Section 3 describes the construction of Divisia monetary aggregates and other data of study. In section 4, we outline the research methodology. Section 5 summarizes the main results of the study and in section 6 we conclude.

Figure-1

Figure 1: The evolution of fiduciary money (MFBEAC), demand deposits (DDBEAC) and quasi money (QMBEAC), BEAC

Figure-2

Figure 2: The evolution of fiduciary money (MFBCEAO), demand deposits (DDBCEAO) and quasi money (QMBCEAO), BCEAO

According to microeconomic demand theory, if indeed these assets were perfect substitutes, rational economic agents would choose to hold only one asset class unless all assets have the same user cost. However, there is sufficient evidence on differences in user costs and on imperfect substitution between components of monetary aggregates. Divisia monetary aggregates were introduced by the seminal work of Barnett to overcome the theoretical deficiencies of traditional monetary aggregates. Barnett constructs monetary aggregates, which take into account the degree of monetarity of different monetary assets with a rigorous application of theories of aggregation and index numbers. Hence, Divisia index is theoretically the most relevant in the sense that it is constructed with solid theoretical foundations. Credit card On the

About The Author

Kevin J. Brandon

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