Modern and Traditional Methods for Measuring Money Supply: The Case of Saudi Arabia
“A monetary aggregate that is an unweighted sum of components has the advantage of simplicity, but a monetary aggregate with weighted components may be expected to exhibit a stronger link to aggregate spending in an economy. By weighting the monetary components, a Divisia Money formulation takes account of the trade-off between the medium-of-exchange and store-of-value functions of holding of money components.”
2. Monetary Aggregation Theory and Statistical Index Numbers
3. Data Descriptions and Sources
4. Constructing New Monetary Aggregates for Saudi Arabia
Conflicts of Interest
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- 1Divisia indexes were proposed and analyzed formally by François Divisia in 1926, and discussed in related 1925 and 1928 works. Barnett linked aggregation theory to monetary economics and accordingly produced the Divisia monetary indexes. See Barnett [3,4] and Barnett and Serletis  for more details.
- 2While aggregation and index number theory are highly developed in the fields of consumer demand theory and production theory, they were not applied to monetary theory until Barnett [1,2] derived the correct formula of the price (user cost) of monetary assets and thereby produced a connection between monetary economics and index number theory. Alkhareif and Barnett  provide a formal derivation of the user cost formula.
- 3BoE has published Divisia money series since 1993. The Center for Financial Stability (CFS) in New York City provides a directory on the literature pertaining to Divisia monetary aggregations for over 40 countries throughout the world. For more information on Divisia monetary aggregates, visit the CFS website at www.centerforfinancialstability.org/amfm.php.
- 4The complete dataset used in this study is available as an Excel workbook. For more information, contact the authors at: [email protected].
- 5For a more detailed discussion of aggregation theory and statistical index number theory, see Barnett .
- 6Statistical index number theory offers parameter-free approximations to aggregator functions.
- 7Some papers impute an implicit rate of return on demand deposits (see, e.g., Klein  and Startz ). Nevertheless, given the fact that there is neither public data nor solid evidence on such an imputation, we exclude implied interest rates on demand deposits. In addition, Saudis are relatively insensitive to interest rates paid on their personal banking deposits, as a result of religious and cultural reasons. The ubiquitous prevalence of gold and platinum debit cards, which entitle the holders to special services at the bank branches, suggests that Saudis prefer these services in lieu of receiving interest on their demand deposits. It should be noted that there are no explicit legal prohibitions to the paying of interest.
- 8Perfect substitutability among assets exists, if and only if, all assets within an aggregate offer the same rate of return.
- 9The stock market decline in 2006 was the case of a classical asset bubble caused by a flood of oil money. The boom-bust cycle was exacerbated by retail investors who drove the average P/E ratio to a value higher than 50 at one point. The 2008 spike of the Divisia growth rate was likely driven by the high oil prices that prevailed in early to mid-2008.
- 10See Alkhareif and Barnett  for a more complete discussion pertaining to the user-cost subject.
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Barnett, W.A.; Alkhareif, R.M. Modern and Traditional Methods for Measuring Money Supply: The Case of Saudi Arabia. Int. J. Financial Stud. 2015, 3, 49-55. https://doi.org/10.3390/ijfs3010049
Barnett WA, Alkhareif RM. Modern and Traditional Methods for Measuring Money Supply: The Case of Saudi Arabia. International Journal of Financial Studies. 2015; 3(1):49-55. https://doi.org/10.3390/ijfs3010049Chicago/Turabian Style
Barnett, William A., and Ryadh M. Alkhareif. 2015. "Modern and Traditional Methods for Measuring Money Supply: The Case of Saudi Arabia" International Journal of Financial Studies 3, no. 1: 49-55. https://doi.org/10.3390/ijfs3010049