Taxation and Monetary Aggregation.

This study examines the correspondence of the Divisia and currency equivalent (CE) measures of money to the optimal aggregate under contemporaneous taxation of interest income. We show that although this behavior can violate a condition regarding monetary aggregation under uncertainty and risk aversion, several important results continue to hold. The conventional Divisia index exactly tracks the theoretically determined aggregate. With strong separability of currency in the aggregator function, the currency equivalent measure emerges from this framework. Even under contemporaneous taxation of interest income, the theoretically correct Divisia and CE measures are based upon pretax interest rates. [ABSTRACT FROM AUTHOR]