Consumption Loan Augmented Divisia Monetary Index and China Monetary Aggregation

Abstract

Simple sum monetary aggregates are based on accounting conventions and have no aggregation theoretic foundations in economic theory. In contrast, Divisia monetary aggregates are directly derived from aggregation and index number theory. Credit card services cannot be included in simple sum monetary aggregates since accounting conventions cannot aggregate over assets and liabilities. However, microeconomic aggregation theory aggregates over service flows, not stocks, regardless of whether from assets or liabilities. As a result, it has recently been shown that Divisia monetary aggregates can be augmented to include credit card services and are available from the Center for Financial Stability in New York City. Other sources of consumer credit cannot be included in Divisia monetary aggregates for the United States since other sources of consumer credit in the United States are linked to specific groups of consumer goods and hence, violate the weak separability condition for the existence of an aggregator function. However, China produces a unique opportunity to broaden the Divisia monetary aggregates since sources of consumer credit, not limited to credit cards, are applicable to all consumption purchases and hence, do not violate the existence condition for an aggregator function. We report initial results with a broader Chinese Divisia monetary aggregate, including not only credit card services but also other broadly acceptable consumer loan services.