The (in)stability of money demand in the euro area: lessons from a cross-country analysis

The instability of standard money demand functions has undermined the role of monetary aggregates for monetary policy analysis in the euro area. This paper uses country-specific monetary aggregates to shed more light on the economics behind the instability of euro area money demand. Our results obtained from panel estimation indicate that the observed instability of standard money demand functions could be explained by omitted variables like e.g. technological progress that are important for money demand but constant across member countries.     

Estimating A European Demand For Money

European Monetary Union will come into existence in 1999. This raises questions related to the monetary policy targets that will be adopted by the European Central Bank (ECB). For both likely candidates, targeting a money aggregate or an inflation target, the existence of a stable money demand function at a European level is important. In this paper estimates of such a European money demand for narrow and broad money for the actual 11 EMU countries based on quarterly aggregate data from 1964 to 1994 are presented. It is argued that statistically satisfactory and economically interpretable functions can be found. Moreover, the estimated models appear to be stable over a period of 20 quarters. This raises the hopes that the ECB will face a stable money demand and be able—at least for a certain time—to use past aggregate data for policy purposes.     

Money demand in Hungary and Poland

This paper analyses the determinants and the stability of money demand functions in Hungary and Poland, using an error-correction framework. The null of stable cointegration relationships cannot be rejected in some specifications. The results suggest that long-run parameters are in line with economic theory. While judging the appropriateness of different strategies of monetary policy on the basis of these findings alone would be premature, the paper suggests that money demand functions can serve as a useful reference for monetary authorities.     

How justified is abandoning money in the conduct of monetary policy in Australia on the grounds of instability in the money‐demand function?

The role of money in the design and conduct of monetary policy has reemerged as an important issue in both advanced and developing economies, especially since the 2007 global financial crisis. A growing body of recent literature suggests that the causal relationship between money supply growth and inflation remains intact across countries and over time and that this relation is not conditional on the stability of the money‐demand function or whether money is endogenous or exogenous. Moreover, critical for a rule‐based monetary policy is the presence of a long‐run stable money‐demand function, rather than a short‐run money‐demand model that may exhibit instability for many reasons, including problems with estimating a money‐demand model with high‐frequency data. Provided that a stable money‐demand function exists, it could be useful to establish long‐run equilibrium relations among money, output, prices, and exchange rates, as the classical monetary theory suggests. Within this analytical framework, this paper addresses the question of whether money has any role in the conduct of monetary policy in Australia. The conventional wisdom is that the money‐demand function in Australia has been unstable since the mid‐1980s due to financial deregulation and reforms; this led to a change in the strategy of monetary policy for price stability in the form of inflation targeting that ignores money insofar as inflation and its control are concerned. This paper reports empirical findings for Australia, obtained from a longer quarterly data series over the period 1960Q1–2015Q1, which suggest that instability in the narrow‐money‐demand function in Australia was primarily due to the exclusion of variables which have become important in the deregulated environment since the 1980s. These findings are confirmed by an expanded form of the narrow‐money‐demand function that was found stable over the past two decades, although it experienced multiple structural breaks over the study period. The paper draws the conclusion that abandoning the monetary aggregate as an instrument of monetary policy in Australia, under a rule‐based monetary policy such as inflation targeting, cannot be justified by instability in the money‐demand function or even by lack of a causal link between money supply growth and inflation.     

On the empirical relevance of the Lucas critique: the case of euro area money demand

This paper examines the relevance of the Lucas critique for euro area money demand. Based on the money in the utility function approach, a vector error correction model is specified to investigate the relationship between money and inflation in times of policy shifts. A well defined equation for money demand is obtained. The results indicate that the evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Our results show that the Lucas critique can be refuted in case of euro area money demand for the period of quantitative easing. Thus, the estimated money demand equation provides reliable information for the conduct of future monetary policy.     

货币供给内生环境下财政对内需的影响研究

本文首先考察了我国货币供给内生的现实环境,并采用ARDL方法对我国经验数据进行实证检验,验证了我国货币供给的内生性问题,表明税收和政府投资是影响货币供给的内生性因素。在此基础上,从货币供给内生的前提出发,本文构建了扩展的内需增长模型,用SVAR方法考察了财政对我国内需增长率的影响。实证结果显示,税收和政府投资增速提高,均会对内需增长率产生负面影响。同时,本文还探讨了货币供给内生环境下财政对内需的影响机制,认为税收和政府投资会影响货币供给,通过新的影响路径对内需产生负面影响。     

Monetary policy with an overrestricted demand for money equation: Chile in the 60's

The purpose of this paper is to show that in designing monetary policy special care should be taken in the specification of the demand for money equation. An evaluation of the a priori restrictions imposed by Chilean monetary authorities on the demand for money equation during 1965–1969 demonstrates that monetary policy, rather than passively accomodating the supply of money to the demand for money as was the intention of the Central Bank, instead actively restricted the supply of money below the quantity demanded.     

The cost of capital,asset prices,and the effects of monetary policy

The primary objective of this paper is to study the interaction between monetary policy, asset prices, and the cost of capital. In particular, we explore this issue in a setting where individuals face idiosyncratic risk. Incomplete information also provides a transactions role for money so that monetary policy can be studied. In contrast to standard monetary growth models which focus on the transmission of monetary policy to the demand for capital goods, we incorporate a separate capital goods sector so that the supply response to monetary policy is taken into account. Consequently, in contrast to the standard monetary growth model, monetary policy plays an important role in investment activity through the relative price of capital goods. Moreover, different sources of productivity can affect the degree of risk sharing. Although the optimal money growth rate falls in response to an increase in productivity in either sector of the economy, monetary policy should react more aggressively to the level of productivity in the capital sector.     

Stability of Money Demand and Monetary Policy in Papua New Guinea (PNG): An Error Correction Model Analysis

An error correction model (ECM) is used to study the Properties of money demand and to evaluate the appropriate monetary policy in PNG. The study confirms that the determinats of money demand are real GDP, nominal interest and inflation rate. The income elasticity of money demand is very low. The demand for money in PNG was stable during 1979-95, suggesting that the monetary targeting regime by the PNG Central Bank is feasible. However, as PNG proceeds with economic reforms that Includes financial sector reform and a floating exchange rate regime, the stability of the demand for money may have to be re-examined periodically. The best approach for conducting the monetary policy in PNG is to target the inflation rate. [E41, E52, C22]     

On the empirical specification of the European demand for money

This paper tests several aspects concerning the specification of an empirical demand for money function for the European Monetary Union. The econometric results show that wealth is a statistically significant determinant for the demand for money. A homogeneous sample period is statistically established, and a demand equation for liquid assets (other than strict money) is presented. A new method to weight and add national variables is also suggested to obtain European aggregates. The main policy implication is that monetary aggregate targeting should not be the main basis for monetary policy implementation.     

International Trade,Budget Deficits,and the Interest Rate

In a keynote address to the Joint Council on Economic Education, the author pointed out that a tight money policy, budget deficits, and greater after-tax profitability of investment in the United States have contributed to the strength of the dollar and to the flow of funds into this country. The consequence and implication of this are examined, both with respect to the past and the near future.     

Policy Uncertainty and the Demand for Money in Korea: An Asymmetry Analysis

Previous studies included money supply volatility as well as output volatility as measures of uncertainty in estimating the demand for money. However, a more comprehensive measure of uncertainty is now constructed for many countries and is known as policy uncertainty. When we included this new measure in the formulation of the demand for money in Korea and relied upon a nonlinear specification of the money demand which allows us to assess the asymmetric effects of changes in the policy uncertainty measure, we found asymmetric long-run effects of policy uncertainty on the demand for cash in Korea. Our conjecture is that increased uncertainty induces Koreans to hold less cash in favor of safer assets and decreased uncertainty has opposite effects, though at different rate.     

Monetary Policy and Capital Inflow*

Capital inflow has been depicted in the model developed by Pentti Kouri and Michael Porter as being determined exclusively by monetary forces, with GNP entering the equation through its impact on the demand for money. If this is correct, disaggregation of GNP should have little effect on the estimates of response parameters in the model. It is found that replacing GNP by investment and non-investment spending has a significant effect on the estimates, suggesting that capital inflows have direct purposes which are not well represented in a purely monetary model. An attempt is made to construct a money policy equation as the second part of a simultaneous system depicting the interplay of monetary policy and capital inflow. In spite of claims to the contrary, it is found that simultaneous estimation gives results which differ considerably from those of single-equation methods.     

MODELLING DEMAND FOR BROAD MONEY IN AUSTRALIA*

The existence of a valid long‐run money demand function is still important for the conduct of monetary policy. It is argued that previous work on the demand for money in Australia has not been very satisfactory in a number of ways. This paper examines the long‐ and short‐run determinants of the demand for broad money employing the Johansen cointegration technique. Using quarterly data for the period 1976:3–2002:2, this paper finds, inter alia, that the demand for broad money is cointegrated with real income, the rate of return on 10‐year Treasury bonds, the cash rate and inflation. It appears that a disequilibrium in the demand for money can affect the efficacy of interest rate policy in the long run via its impact on future output growth and output gap.     

股票价格、实体经济与货币政策研究——基于我国1997-2011年的经验证据

本文运用格兰杰因果关系检验和向量自回归方法分析了1997年1月至2011年6月我国股票价格、GDP、通货膨胀率和货币政策的关系,实证结果表明,在中国,股票价格对通货膨胀的效应为正向,即股市上涨能带动通货膨胀水平的上涨。股票市场对GDP的影响短期内主要表现为替代效应,长期来看,则是财富效应和投资效应占主导;同时,货币供应量和利率对股票价格均有影响,但影响均不显著。通过格兰杰因果关系检验发现,利率变动导致货币供应量和股票价格发生变化。而货币供应量的变化影响着通货膨胀,也一定程度影响利率和股票价格。通过广义脉冲响应发现,中国人民银行紧缩性的利率政策并不能抑制股票价格上涨。增加货币供给短期内能够推动股市上涨,但长期对股市仍没有效果。     

我国企业投资对财政货币政策冲击反应的实证分析

本文运用结构向量自回归（SVAR）模型方法研究了我国企业投资对财政货币政策冲击的反应。通过采用1998年1月～2009年4月的月度数据实证研究表明：在经济周期的不同阶段,央行控制货币供给量的能力存在差异,导致货币政策执行效果不同。在经济繁荣阶段,社会资金运用效率较高,不存在剩余流动性,央行可以较容易地通过调整基础货币和货币乘数控制货币供给总量。这时货币供给的外生性较强,货币政策作用效果比较显著;而在经济衰退阶段,可选择的投资机会较少,流动性相对过剩,货币供给内生性增强,这时央行采取扩张性货币政策不能有效提高货币供给量,货币政策作用效果减弱。短期内虽然财政支出对企业投资会产生正向影响,但是负向影响要大于正向影响,也就是说财政政策对企业投资具有明显的挤出效应。     

中国货币需求稳定性的实证研究--基于1994-2005年的协整分析

本文以经济改革和金融发展为背景,从经典货币需求理论分析出发,运用协整检验和误差校正模型对我国货币需求的稳定性问题展开研究.分析结果显示,货币需求、国民收入、利率和通货膨胀率之间存在协整关系;我国货币需求主要受收入因素影响而呈现出长期稳定性特征,长期稳定的货币需求对其即期增长的抑制作用不明显,货币需求函数表现出高收入弹性和低利率弹性,而利率的外生性削弱了货币需求对利率的调节作用;基于VEC模型的短期Granger因果检验,支持货币量、利率和货币政策最终目标之间短期均衡关系的存在.     

Asymmetric responses of money demand to oil price shocks in Saudi Arabia: a non-linear ARDL approach

Saudi Arabia is an open oil-based economy with fixed exchange rates; therefore, it has limited monetary policy autonomy. Using non-linear autoregressive distributed lag approach, this article investigates the asymmetric effects of oil price shocks on the demand of money in Saudi Arabia over the period 1990:Q1–2014:Q4. The empirical results show evidence of positive long run but asymmetric effects of oil price shocks on the money demand. In particular, we find that the positive oil price shocks are more important than negative shocks. Therefore, two policy responses can be considered: either sustaining the fixed exchange rate regime and following an economic diversification policy or switching towards a flexible exchange rate regime to achieve price stability. In that case, the existence of a stable money demand function in Saudi Arabia is a necessary precondition for adopting a monetary policy strategy targeted to price stability using instruments like money targeting.     

A K% MONEY GROWTH LEADERSHIP RULE IN AN INTERNATIONAL MONETARY POLICY GAME

This paper examines a version of the Friedman k% money growth rule in an open economy monetary policy game. Using the two-country model proposed by Canzoneri and Henderson (1991), we show that, in response to asymmetric aggregate demand shocks, the Pareto-efficient outcome can be achieved by a policy that we call a k% money growth leadership rule. Following that rule, one country, the leader, sets her money supply growth rate, and the follower sets her money supply growth rate so as to keep the sum of nominal money supply growth at k%. We show that this policy yields the same outcome as does cooperative equilibrium. We also show that alternative policy rules, such as keeping exchange-rate adjusted money supply growth at k%, or forming a currency union, will not lead to the Pareto-efficient outcome in response to these demand shocks. ( JEL E5, F3)