An Alternative Approach to Monetary Aggregation in DEA

This paper proposes a set of alternative DEA-based money indices that are proved to be both theoretically and empirically competing monetary aggregates since they perform as good as the Divisia aggregates. Based on all the results concerning causality, forecasting and money demand, we conclude that DEA money aggregates prove to be at least competing alternatives to the Divisia aggregates, and hence, suggest that these new aggregates may be considered along with the existing weighted monetary aggregates like the Divisia ones. Given the inherent benefit of the doubt weighting mechanism underlying the DEA models where the optimal weight assigned by DEA to each monetary asset reflects the ongoing financial innovation-and the Reserve Bank of India’s policy priority in the distribution of total liquidity, we feel that the DEA money indices can truly capture the liquidity better with ongoing financial innovations in the economy