Financial innovation,new assets,and the behavior of money demand |
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| Institution: | 1. Organic Petrology Group, Birbal Sahni Institute of Palaeosciences, 53-University Road, Lucknow 226 007, India;2. Department of Geology, Banaras Hindu University, Varanasi 221 005, India;3. Department of Earth Sciences, Indian Institute of Technology, Bombay, Powai, Mumbai 400 076, India;4. CSIR-Central Institute of Mining and Fuel Research, Barwa Road, Dhanbad 826 015, India;1. East China University of Science and Technology, Meilong Road 130, Shanghai 200237, China;2. International Institute for Applied System Analysis, Schlosplatz 1, A-2361 Laxenburg, Austria |
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| Abstract: | Two fundamental changes in US banking regulations have affected the behavior of money demand (M1). The first authorized checkable deposit accounts paying explicit interest rates. The second allowed these rates to be market determined. The theoretical literature does not directly address the impact of these events, suggesting that they are primarily an empirical issue. However, the empirical literature has yet to agree on the impact of financial innovation on money demand; for example, several studies report an increase in the elasticity of money demand, several others report a decline. This paper uses a Lancaster-type choice model to analyze formally the expected impact of these two changes on the demand for money. The model derives specific conditions under which (i) the demand for money increases as new assets are introduced and (ii) the impact of either the introduction of new assets or the elimination of interest rate restrictions on the elasticity of money demand. |
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