6 - The microeconomic theory of monetary aggregation

Summary

In recent decades there has been a resurgence of interest in index numbers resulting from discoveries that the properties of index numbers can be directly related to the properties of the underlying aggregator functions that they represent. The underlying functions – production functions, utility functions, etc. – are the building blocks of economic theory, and the study of relationships between these functions and index number formulas has been referred to by Samuelson and Swamy (1974) as the economic theory of index numbers.

Introduction

The use of economic index number theory was introduced into monetary theory by Barnett (1980a, 1981a). His merger of economic index number theory with monetary theory was based upon the use of Diewert's approach to producing “superlative” approximations to the exact aggregates from consumer demand theory. As a result, Barnett's approach produces a Diewert-superlative measure of the monetary service flow perceived to be received by consumers from their monetary asset portfolio. However, aggregation and index number theory are highly developed in production theory as well as in consumer demand theory. Substantial literatures exist on aggregation over factor inputs demanded by firms, aggregation over multiple product outputs produced by firms, and aggregation over individual firms and consumers. In addition, substantial literatures exist on exact measurement of value added by firms and of technical change by firms. All of these literatures are potentially relevant to closing a cleared money market in an exact aggregation-theoretic monetary aggregate.