CONSTRUCTION OF THE MONETARY SERVICES INDEX FOR SINGAPORE

Abstract

This exercise addresses the important issue regarding the appropriate method of measuring the quantity of money in an economy. The traditional simple-sum monetary aggregates implicitly assume that different component assets are perfect substitutes and thus are not generally consistent with the economic theory of consumer decision making. Consequently, simple-sum aggregation may not produce a theoretically satisfactory measurement of money. Its incompetence has therefore driven the application of an alternative approach to measure the aggregate quantity of money. This exercise attempts to construct the Monetary Services Index for Singapore. The objective is to provide a more appropriate indication of liquidity and also as an alternative to conventional monetary aggregates in measuring the quantity of money in the Singapore economy. The advantage of such an index over the simple-sum monetary aggregates lies in its microeconomic foundations which do not impose ex ante assumptions regarding the elasticities among monetary assets. The Monetary Services Index allows the proportional change in the aggregate money supply to be computed as a weighted average of proportional changes in its components. The heart of the methodology employed rests on both the aggregation theory and statistical index number theory. These two fields have been developing independently until the introduction of superlative index numbers and the derivation of the user cost of monetary asset services. Subsequently, a stronger link is established between the monetary aggregation and the index number literatures, thereby forming the core of this exercise.