Permanent prices,expected price changes,and the demand for money

This paper investigates the empirical validity of the distinction between measured and permanent prices for cash balance decisions. The use of permanent prices has been advocated by Friedman over twenty five years ago, but the idea has received little attention in the literature. Using Canadian quarterly data, we find that the permanent price hypothesis yields meaningful estimates of the demand for money, but it does not appear to contribute significantly to our understanding of cash balance decisions. A number of assumptions about the relationship between the elasticities of income, price, and price change expectations are tested as well.