Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-19T22:00:11.823Z Has data issue: false hasContentIssue false
  • English
  • Français

CREDIT CARDS, THE DEMAND FOR MONEY, AND MONETARY AGGREGATION

Published online by Cambridge University Press:  24 August 2021

Jinan Liu  and
Apostolos Serletis
Jinan Liu
Affiliation:
University of Nebraska at Omaha
Apostolos Serletis*
Affiliation:
University of Calgary
*
Address correspondence to: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta, T2N 1N4, Canada. e-mail: [email protected], http://econ.ucalgary.ca/profiles/162-33618 Phone: (403) 220-4092. Fax: (403) 282-5262.
Get access Rights & Permissions [Opens in a new window]

Abstract

We use nonparametric and parametric demand analysis to empirically estimate a credit card-augmented monetary asset demand system, based on the Minflex Laurent flexible functional form, and a sample period that includes the 2007–2009 global financial crisis and the COVID-19 pandemic. We also use multivariate copulae in an attempt to capture various patterns of dependence structures. In doing so, we relax the joint normality assumption of the errors of the demand system and estimate the model without having to delete one equation as is usually the practice. We show that the Minflex Laurent copula-based demand system produces a higher income elasticity for credit card transaction services and higher Morishima elasticities between credit card transaction services and monetary assets compared to the traditional estimation of the Minflex Laurent demand system. We also show that credit cards are substitutes for monetary assets and that there is lower tail dependence between the demand for credit card transaction services and transaction balances.

Keywords

Credit Card-Augmented Divisia Monetary AggregatesMinflex Laurent Functional FormCopulae
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 8 , December 2022 , pp. 2161 - 2203
Copyright
© The Author(s), 2021. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This paper is based on Chapter 4 of Jinan Liu’s Ph.D. thesis at the University of Calgary. We would like to thank William Barnett, an Associate Editor, three anonymous referees, and Libo Xu for useful comments that greatly improved the paper. We would also like to thank the following members of Jinan’s dissertation committee: Daniel Gordon, David Walls, and Atsuko Tanaka.

References

Aas, K. and Berg, D. (2009) Models for construction of multivariate dependence: A comparison study. The European Journal of Finance 15, 639–659.CrossRefGoogle Scholar
Bae, K., Karolyi, G. and Stulz, R. (2003) A new approach to measuring financial contagion. The Review of Financial Studies 16, 717–763.CrossRefGoogle Scholar
Ball, L. (2001) Another look at long-run money demand. Journal of Monetary Economics 47, 31–44.CrossRefGoogle Scholar
Barnett, W. A. (1978) The user cost of money. Economics Letters 1(2), 145–149.CrossRefGoogle Scholar
Barnett, W. A. (1980) Economic monetary aggregates: An application of aggregation and index number theory. Journal of Econometrics 14(September), 11–48.CrossRefGoogle Scholar
Barnett, W. A. (1983) New indices of money supply and the flexible Laurent demand system, Journal of Business and Economic Statistics 1(1), 7–23.Google Scholar
Barnett, W. A. and Lee, Y. W. (1985) The global properties of the minflex Laurent, generalized Leontief, and translog flexible functional forms. Econometrica 53, 1421–1437.CrossRefGoogle Scholar
Barnett, W. A., Fisher, D. and Serletis, A. (1992) Consumer theory and the demand for money. Journal of Economic Literature 30(4), 2086–2119.Google Scholar
Barnett, W. A. and Serletis, A. (2008) Consumer preferences and demand systems. Journal of Econometrics 147(2), 210–224.CrossRefGoogle Scholar
Barnett, W. A., Chauvet, M. and Su, L. (2016) Nowcasting nominal GDP with the credit card-augmented Divisia monetary aggregates. Johns Hopkins University Working Paper, Studies in Applied Economics, SAE 59.Google Scholar
Barnett, W. A. and Su, L. (2019) Risk adjustment of the credit-card augmented Divisia monetary aggregates. Macroeconomic Dynamics 23(S1), 90–114.CrossRefGoogle Scholar
Barnett, W. A. and Liu, J. (2019) User cost of credit card services under risk with intertemporal nonseparability. Journal of Financial Stability 42, 18–35.CrossRefGoogle Scholar
Barnett, W. A., Han, Q. and Zhang, J. (2021) Monetary services aggregation under uncertainty: A behavioral economics extension using Choquet expectation. Journal of Economic Behavior & Organization 182, 437–447.CrossRefGoogle Scholar
Barnett, W. A., Liu, J., Mattson, R. S. and Noort, J. V. (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economics Review 24, 101–124.CrossRefGoogle Scholar
Barnhart, S. and Whitney, G. (1988) Nonparametic analysis in parametric estimation: An application to translog demand systems. Review of Economics and Statistics 70, 149–153.CrossRefGoogle Scholar
Barten, A. P. (1969) Maximum likelihood estimation of a complete system of demand equations. European Economic Review 1(1), 7–73.CrossRefGoogle Scholar
Bedford, T. and Cooke, R. M. (2001) Probability density decomposition for conditionally dependent random variables modeled by vines. Annals of Mathematics and Artificial Intelligence 32, 245–268.CrossRefGoogle Scholar
Bedford, T. and Cooke, R. M. (2002) Vines - A new graphical model for dependent random variables. Annals of Statistics 30, 1031–1068.CrossRefGoogle Scholar
Belongia, M. T. (1996) Measurement matters: Recent results from monetary economics reexamined. Journal of Political Economy 104(5), 1065–1083.CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2018) Targeting constant money growth at the zero lower bound. International Journal of Central Banking 53, 159–204.Google Scholar
Berndt, E. and Savin, N. (1975) Estimation and hypothesis testing in singular equation systems with autoregressive disturbances. Econometrica 43(5/6), 937–957.CrossRefGoogle Scholar
Blackorby, C. and Russell, R. (1989) Will the real elasticity of substitution please stand up? The American Economic Review 79(4), 882–888.Google Scholar
Brainard, L. (2020) An update on digital currencies. Federal Reserve Board and Federal Reserve Bank of San Francisco’s Innovation Office Hour.Google Scholar
Brechmann, E. and Schepsmeier, U. (2013) Modeling dependence with C- and D-vine copulae: The R package CDVine. Journal of Statistical Software 52(3), 1–27.CrossRefGoogle Scholar
Bullock, M. (2020) Panic, pandemic and payment preferences. Keynote Address at the Morgan Stanley Disruption Evolved Webcast. Reserve Bank of Australia.Google Scholar
Chen, X. and Fan, Y. (2006) Estimation of copula-based semiparametric time series models. Journal of Econometrics 130(2), 307–335.CrossRefGoogle Scholar
Chen, H., Engert, W., Huynh, K. P., Nicholls, G., Nicholson, M. and Zhu, J. (2020) Cash and COVID-19: The impact of the pandemic on the demand for and use of cash. Bank of Canada Staff Discussion Paper.Google Scholar
Clayton, D. G. (1978) A model for association in bivariate life tables and its application in epidemiological studies of familial tendency in chronic disease incidence. Biometrika 65, 141–151.CrossRefGoogle Scholar
Coibon, O., Gorodnichenko, Y. and Weber, M. (2020) The cost of the COVID-19 crisis: Lockdowns, macroeconomic expectations, and consumer spending. NBER Working Paper 27141.CrossRefGoogle Scholar
Dai, W. and Serletis, A. (2019) On the Markov switching welfare cost of inflation. Journal of Economic Dynamics and Control 108, 103748.CrossRefGoogle Scholar
Demetry, M., Hjertstrand, P. and Polisson, M. (2020) Testing axioms of revealed preference in Stata. IFN Working Paper No. 1342, Research Institute of Industrial Economics (Stockholm, Sweden).CrossRefGoogle Scholar
Dery, C. and Serletis, A. (2021) Interest rates, money, and economic activity. Macroeconomic Dynamics, 1–50.Google Scholar
Diewert, W. E. (1974) Applications of duality theory. In: Intriligator, M. and Kendrick, D. (eds.), Frontiers in Quantitative Economics, Vol. 2, pp. 106–171. Amsterdam: North-Holland.Google Scholar
Diewert, W. E. (1976) Exact and superlative index numbers. Journal of Econometrics 4(2), 115–145.CrossRefGoogle Scholar
Donovan, D. (1978) Modeling the demand for liquid assets: An application to Canada. IMF Economic Review 25, 676–704.CrossRefGoogle Scholar
Duca, J. V. and Whitesell, W. C. (1995) Credit cards and money demand: A cross-sectional study. Journal of Money, Credit and Banking 27, 604–623.CrossRefGoogle Scholar
Embrechts, P., McNeil, A. and Straumann, D. (2002) Correlation and dependence in risk management: Properties and pitfalls. In: Dempster, M. (ed.), Risk Management: Value at Risk and Beyond. Cambridge: Cambridge University Press.Google Scholar
Ewis, N. and Fisher, D. (1984) The Translog utility function and the demand for money in the United States. Journal of Money, Credit and Banking 16(1), 34–52.CrossRefGoogle Scholar
Feige, E. L. (1964) The demand for liquid assets: A temporal cross-section analysis. University of Chicago Dissertation.CrossRefGoogle Scholar
Fisher, D. and Fleissig, A. (1997) Monetary aggregation and the demand for assets. Journal of Money, Credit and Banking 29(4), 458–475.CrossRefGoogle Scholar
Fleissig, A. R. and Swofford, J. (1997) Dynamic asymptotically ideal models and finite approximation. Journal of Business Economic Statistics 15, 482–492.Google Scholar
Fisher, R. A. and Russell, E. J. (1922) On the mathematical foundations of theoretical statistics. Philosophical Transactions of the Royal Society of London. Series A, Containing Papers of a Mathematical or Physical Character.Google Scholar
Frank, M. J. (1979) On the simultaneous associativity of F(x, y) and x + y − F(x, y). Aequationes Math 19, 194–226.CrossRefGoogle Scholar
Garratt, R., Lee, M. and Plesset, A. (2020) COVID-19 and the search for digital alternatives to cash. Federal Reserve Bank of New York.Google Scholar
Gumbel, E. J. (1960) Distributions des valeurs extremes en plusieurs dimensions. Publications de lâ Institute de Statistique de lâ Universite de Paris 9, 171–173.Google Scholar
Hendrickson, J. R. (2013) Redundancy or mismeasurement? A reappraisal of money. Macroeconomic Dynamics 18(7), 1437–1465.CrossRefGoogle Scholar
Hjertstrand, P. and Swofford, J. L. (2019) Revealed preference tests of indirect and homothetic weak separability of financial assets, consumption and leisure. Journal of Financial Stability 42(C), 108–114.CrossRefGoogle Scholar
Hjertstrand, P., Swofford, J. L. and Whitney, G. A. (2016) Mixed integer programming revealed preference tests of utility maximization and weak separability of consumption, leisure, and money. Journal of Money, Credit and Banking 48, 1547–1561.CrossRefGoogle Scholar
Hu, L. (2006) Dependence patterns across financial markets: A mixed copula approach. Applied Financial Economics 16 (10), 717–729.CrossRefGoogle Scholar
Jadidzadeh, A. and Serletis, A. (2019) The demand for assets and optimal monetary aggregation. Journal of Money, Credit and Banking 51(4), 929–952.CrossRefGoogle Scholar
Joe, H. (1993) Parametric families of multivariate distributions with given margins. Journal of Multivariate Analysis 46, 262–282.CrossRefGoogle Scholar
Joe, H. (1996) Families of multivariate distributions with given margins and m(m − 1)/2 bivariate dependence parameters. In L. Ruschendorf, B. Schweizer and M. D. Taylor (eds.), Distributions with Fixed Marginals and Related Topics, pp. 120–141.CrossRefGoogle Scholar
Jondeau, E. and Rockinger, M. (2006) The Copula-GARCH model of conditional dependencies: An international stock market application. Journal of International Money and Finance 25(5), 827–853.CrossRefGoogle Scholar
Keating, J. W., Kelly, L. J., Smith, A. L. and Valcarcel, V. J. (2019) A model of monetary policy shocks for financial crises and normal conditions. Journal of Money, Credit and Banking 51(1), 227–259.CrossRefGoogle Scholar
Kim, L., Kumar, R. and O’Brien, S. (2020) Consumer payments and the COVID-19 pandemic: A supplement to the 2020 findings from the diary of consumer payment choice. Federal Reserve Bank of San Francisco.Google Scholar
Krueger, D., Uhlig, H. and Xie, T. (2020) Macroeconomic dynamics and reallocation in an epidemic. NBER Working Paper 27047.CrossRefGoogle Scholar
Kurowicka, D. and Cooke, R. (2006) Uncertainty Analysis with High Dimensional Dependence Modelling. Wiley Series in Probability and Statistics. Chichester: John Wiley.CrossRefGoogle Scholar
Liu, J. and Serletis, A. (2020) Money growth variability and output: Evidence with credit card-augmented Divisia monetary aggregates. Studies in Nonlinear Dynamics and Econometrics 25(4).Google Scholar
Liu, J., Dery, C. and Serletis, A. (2020) Recent monetary policy and the credit card-augmented Divisia monetary aggregates. Journal of Macroeconomics 64.Google Scholar
Lucas, R. E. (1988) Money demand in the United States: A quantitative review. Carnegie- Rochester Conference Series on Public Policy 29, 137–168.CrossRefGoogle Scholar
Meltzer, A. H. (1963) The demand for money: The evidence from the time series. Journal of Political Economy 71, 219–246.CrossRefGoogle Scholar
Mulligan, C. B. and Sala-i-Martin, X. (1992) U.S. money demand: Surprising cross-sectional estimates. Brookings Papers on Economic Activity 23(2), 285–343.CrossRefGoogle Scholar
Ning, C. (2010) Dependence structure between the equity market and the foreign exchange market - A copula approach. Journal of International Money and Finance 29(5), 743–759.CrossRefGoogle Scholar
Patton, A. J. (2006) Modelling asymmetric exchange rate dependence. International Economic Review 47, 527–556.CrossRefGoogle Scholar
Poon, S., Rockinger, M., M. and Tawn, J. (2004) Extreme value dependence in financial markets: Diagnostics, models, and financial implications. The Review of Financial Studies 17(2), 581–610.CrossRefGoogle Scholar
Rodriguez, J. C. (2007) Measuring financial contagion: A copula approach. Journal of Empirical Finance 14(3).CrossRefGoogle Scholar
Serletis, A. (1988) Translog flexible functional forms and substitutability of monetary assets. Journal of Business and Economic Statistics 6(1), 59–67.Google Scholar
Serletis, A. (1991) Modeling the demand for consumption goods and liquid assets. Journal of Macroeconomics 13(3), 435–457.CrossRefGoogle Scholar
Serletis, A. and Feng, G. (2010) Semi-nonparametric estimates of currency substitution between the Canadian dollar and the U.S. dollar. Macroeconomic Dynamics 14(1), 29–55.CrossRefGoogle Scholar
Serletis, A. and Gogas, P. (2014) Divisia monetary aggregates, the great ratios, an classical money demand functions. Journal of Money, Credit and Banking 46(1), 229–241.CrossRefGoogle Scholar
Serletis, A. and Isakin, M. (2017) Stochastic volatility demand systems. Econometric Reviews 36, 1111–1122.CrossRefGoogle Scholar
Serletis, A. and Robb, A. L. (1986) Divisia aggregation and substitutability among monetary assets. Journal of Money, Credit and Banking 18(4), 430–446.CrossRefGoogle Scholar
Serletis, A. and Shahmoradi, A. (2005) Semi-nonparametric estimates of the demand for money in the United States. Macroeconomic Dynamics 9, 542–559.CrossRefGoogle Scholar
Serletis, A. and Shahmoradi, A. (2007) Flexible functional forms, curvature conditions, and the demand for assets. Macroeconomic Dynamics 11, 455–486.CrossRefGoogle Scholar
Serletis, A. and Xu, L. (2019) Interfuel substitution: Evidence from the Markov switching Minflex Laurent demand system with BEKK errors. The Energy Journal 40, 111–128.CrossRefGoogle Scholar
Serletis, A. and Xu, L. (2020) Demand systems with heteroscedastic disturbances. Empirical Economics 58, 1913–1921.CrossRefGoogle Scholar
Serletis, A. and Xu, L. (2021) Interfuel substitution: A copula approach. Journal of Commodity Markets (forthcoming).CrossRefGoogle Scholar
Shapiro, S. and Wilk, M. (1965) An analysis of variance test for normality. Biometrika 52(3/4), 591–611.CrossRefGoogle Scholar
Sklar, A. (1973) Random variables, joint distributions, and copulae. Kybernetica 9, 449–460.Google Scholar
Swofford, J. L. and Whitney, G. A. (1987) Nonparametric tests of utility maximization and weak separability for consumption, leisure and money. Review of Economics and Statistics 69(3), 458–464.CrossRefGoogle Scholar
Swofford, J. L. and Whitney, G. A. (1988) A comparison of nonparametric tests of weak separability for annual and quarterly data on consumption, leisure, and money. Journal of Business and Economic Statistics 6(2), 241–246.Google Scholar
Teles, P. and Zhou, R. (2005) A stable money demand: Looking for the right monetary aggregate. Economic Perspectives 29(1).Google Scholar
Telyukova, I. and Wright, R. (2008) A model of money and credit, with application to the credit card debt puzzle. The Review of Economic Studies 75, 629–647.CrossRefGoogle Scholar
Trivedi, P. and Zimmer, D. (2007) Copula modeling: an introduction for practitioners. Foundations and trends in Econometrics 1(1), 1–111.CrossRefGoogle Scholar
Varian, H. R. (1982) The Nonparametric approach to demand analysis. Econometrica 50(4), 945–973.CrossRefGoogle Scholar
Varian, H. R. (1983) Non-parametric tests of consumer behaviour. Review of Economic Studies 50(1), 99–110.CrossRefGoogle Scholar
Varian, H. R. (1990) Goodness-of-fit in optimizing models. Journal of Econometrics 46, 125–140.CrossRefGoogle Scholar
Velasquez-Giraldo, M., Canavire-Bacarreza, G., Huynh, K. P. and Jacho-Chavez, D. T. (2018) Flexible estimation of demand systems: A copula approach. Journal of Applied Econometrics 33, 1109–1116.CrossRefGoogle Scholar