The role for openness in the demand for money: Evidence from Barbados

This paper uses an optimizing theoretical framework for modelling openness in the demand for money function for a small, open, developing economy; in so doing, it subsumes the ad hoc specifications of three previous studies. Its findings confirm the importance of a measure of openness in the money demand specification for Barbados. More specifically, it appears that transactions associated with the traded sector of the economy exhibit greater elasticity of money demand than those associated with the nontraded sector.     

Relative prices and the demand for money

This paper examines the validity of the conventional specification of money demand with particular reference to the issue of relative prices. It is shown that the conventional money demand function is based on the assumption of weak separability of money from commodities, which forms the basis for the absence of relative prices in money demand. Empirical and presumptive evidence suggests that weak separability is not tenable, implying that relative prices are important in money demand. The inclusion of commodity prices in money demand significantly affects the interest and income elasticity estimates. Finally, it is noted that the aggregate consumption function excluding commodity prices also has no theoretical and empirical base.     

Financial Deregulation and Stability of Money Demand: The Australian Case

This paper analyses the Australian economy in the post-war period. The analysis examines stationarity and cointegrating relationship among output, interest rate and money. The analysis shows that Australia has had a stable cointegrating relationship among output, interest rate and money during the post-war period although the country deregulated its financial sector in the 1980's. Australia's money demand function fails to reject the hypothesis that the interest elasticity of money demand is 0.5. In addition, one specification of the country's money demand function fails to reject the hypothesis that the income elasticity of money demand is unity. The specification is the Vector Error Correction Model that includes real output, real balances, an interest rate, and a deregulation dummy variable, with the lag length of three.     

The transactions demand for money in the presence of currency substitution: evidence from Vietnam

Currency substitution – the use of foreign money to finance transactions between domestic residents – is widespread in low income and transition economies. Traditionally, however, empirical models of the demand for money tend to concentrate on the portfolio motive for holding foreign currency, while maintaining the assumption that the income elasticity of demand for domestic money is invariant to the degree of currency substitution. A simple re-specification of the demand for money is offered which more accurately reflects the process of currency substitution by allowing for a variable income elasticity of demand for domestic money. This specification is estimated for Vietnam in the 1990s. Using a standard cointegration framework evidence is found for currency substitution only in the long-run but well-defined wealth effects operating in the short-run.     

Enterprise demand for money and illiquidity crises in Yugoslavia

This paper examines the short-term demand for money by Yugoslav enterprises during the 1961–1971 period in an attempt to explain the recurrence of so-called ‘illiquidity crises’ in the Yugoslav economy. The empirical results indicate that a traditional transactions demand for money equation, modified to allow for the effects of inflationary expectations and lagged adjustment, can explain the cash-holding behavior of the Yugoslav enterprise sector in the post-1965 period. Further examination of the evidence indicates that the decline in enterprise liquidity which occured during this period was also the result of enterprise response to the growth of money substitutes and the result of involuntary increases in holdings of trade credit occasioned by payments' defaults.     

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.     

The Monetary Analysis of Hyperinflation and the Appropriate Specification of the Demand for Money

Abstract. This paper emerges from the failure of the traditional models of hyperinflation with perfect foresight. Insights from two standard optimizing monetary settings and economic reasoning from case studies of extreme hyperinflation episodes provide relevant requirements for the specification of the demand for money during hyperinflation. The paper demonstrates that the possibility of perfect foresight monetary hyperinflation paths depends robustly on the essentiality of money. The essentiality of money provides some depth of explanation of the reasons why the popular semi‐log schedule of the demand for money is not appropriate for analysing monetary hyperinflation with perfect foresight. The paper proposes a simple test of money essentiality for the appropriate specification of the demand‐for‐money equation in empirical studies of hyperinflation.     

Globalization,Financial Liberalization and the Behavior of the Long Run Money Demand in the Bangladesh Economy

ABSTRACT

The paper estimates the long run demand for money function in the Bangladesh economy using cointegration and the Vector Error Correction Modeling (VECM) technique. The cointegration results suggest that although the process of globalization has shown no significant impact on money demand by the fact that the foreign interest rate is seen as statistically not significant, the financial liberalization has an important impact, reflected in the statistically significant role of domestic interest rate, in influencing both M1 and M2 money demand. An estimate of VECMs also reveals the fact that the short run speed of adjustment is moderately influenced by the financial reform measures to establish the long run relation between money balances, income and domestic interest rates. The phenomenon of credit constraint in the context of a developing country has shown no significant role in influencing money demand, which may imply that the stage of financial development is getting higher level in the Bangladesh economy. The existence of exchange rate depreciation in the cointegration relation with the expected sign suggests that currency substitution is now effective in the monetary sector and, therefore, its impact should be considered in the Bangladesh monetary policy matrix.     

货币需求弹性决定因素的实证研究

文章从企业和家庭层面的货币需求异质性,对传统货币需求函数进行修正,分析货币需求收入弹性和利率弹性的决定因素。实证结果表明,产业结构和经济开放度不但直接影响货币需求规模,而且通过货币需求弹性间接影响货币需求的变化,产业结构主要对货币需求收入弹性显著影响,而经济开放度对货币需求收入弹性和利率弹性均有显著影响。产业结构升级将弱化对货币需求收入弹性的影响,而加剧对货币需求规模的影响。经济开放度对货币需求的影响将逐渐由正转负,并最终导致货币需求下降。     

A wage-bargaining model for Denmark

Recent models of wage bargaining provide the background for formulating a wage-employment model which is estimated for the manufacturing sector in Denmark. Emphasis is laid on an interpretation of the empirical findings in a maroeconomic context. The major results are that wage setting is not characterized by money illusion, shorter working hours lead in the long run to full wage compensation and a fall in total number of hours worked, and expansionary demand management policies induce wage increases which eventually eliminate the expansionary effects on activity.     

Consumer expenditure,the demand for money,and the Hall hypothesis

Although a considerable amount of work has been conducted on the validity of the Hall hypothesis, as applied to consumer expenditure, there has been negligible empirical work on the Hall hypothesis as applied to the demand for money. In this paper the Hallian hypothesis is applied to consumer expenditure and the demand for money using quarterly data for six countries.     

Measuring income elasticity for Swiss money demand: What do the cantons say about financial innovation?

Recent time-series evidence has re-confirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy.     

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.     

中国的M_2/GDP(1980—2000):趋势、水平和影响因素

M2 GDP蕴涵了货币需求与国民收入之间的函数关系 ,其水平及变动由货币需求决定。 1 980— 2 0 0 0年间 ,中国的M2 GDP呈上升趋势 ,反映出同期货币需求水平不断上升的现实。除长期走势之外 ,中国的M2 GDP还呈逆周期变动趋势 ,原因在于由谨慎动机引起的货币需求具有逆周期波动的特点。从世界范围内来看 ,中国属于M2 GDP比较高的国家 (地区 )之一 ,但国别比较表明各国 (地区 )并不存在一个标准水平。中国的M2 GDP 2 0年来快速上升 ,从货币层面来看 ,其原因是准货币 GDP快速上升 ;从经济层面来看 ,其原因是 :货币化和居民储蓄存款的投资性质、银行等金融机构金融工具单一、金融市场不发达、银行不良资产比率高。由于M2 GDP水平是由货币需求因素决定的 ,因而不能靠压低货币供应的办法来遏止其上升。     

Determinates of the decline in the income-velocity of money in China: a new perspective

The income velocity of money in China has been declining since the country’s reform. By studying the money demand behavior in the agricultural and non-agricultural sectors, we found that the marginal propensity to money demand is much higher in the non-agricultural sector. This implies that as the share of the agricultural sector in national income declines, monetary expansion is expected to meet not only the needs of income growth, but also the rapid structural shifts in the sectoral composition of income. Hence, non-inflationary monetary expansion is possible as development proceeds. This provides a new perspective in understanding the decline in the income-velocity of money in China. __________ Translated from Social Sciences in China (中国社会科学), 2005,(4) (in Chinese)     

The farmer and the money economy: The role of the private sector in the agricultural development of LDCs

The world's food/people balance is precarious now and will become more precarious in the future, in terms of both supply and price.The grain producing industrial countries have come close to reaching their production potential. The solution lies in exploiting the production capacity of the developing world.At present only half of the world's good arable land is being farmed. Most of the other half does not have the necessary infrastructure, and opening it up to cultivation will require major capital investment. This means that a serious political commitment is required, primarily by LDC governments. There are concomitants for aid policies as well.The key action-oriented question is where, and how, productivity increase can take place. The authors suggest that the most effective method requires involvement of the private sector, specifically the participation of small landholders, working 1–5 acres, grouped around a corporate core. The corporate core provides technical, educational, and financial inputs, processes, and/or markets the output. In a widening circle of socioeconomic benefits, as small holder productivity increases, work can be offered to landless peasants, and both the farmer and the peasant are brought into the money economy with the overall developmental dynamic this implies.Most effective is a holistic approach involving all segments of the rural community, particularly women.This paper will offer empirical data from case histories in developing countries and will derive from this data (and the extensive exposure of the coauthors to the problems and opportunities of agribusiness worldwide) policy implications for the public sector and strategy implications for the private sector.In planning the transition to sustainable societies, the concept of “triage” is ethically repugnant, politically explosive, and economically devastating. An effective approach to the problem of agriculture would eliminate the current de facto triage, where food/people imbalance leads to the death of hundreds of millions through starvation and malnutrition.     

Money and prices: evidence from the G7 countries

This paper examines the exogeneity of money and prices within a money demand vector error-correction model. The exogeneity of the variables is central to several ‘buffer stock’ models. However, the paper makes two modifications to the traditional approach. The first is to explicitly acknowledge the importance of the supply of money function by including the function alongside its demand counterpart. The second is to estimate the behaviour of the nominal sector and real sector simultaneously. Overall, the results from the G7 countries suggest that the concerns raised by ‘buffer stock’ models are relevant.     

Demand for money and expected inflation

The role of the expected rate of inflation in the demand for money has been highly controversial both at the theoretical and the empirical level. This note critically discusses these issues and puts forward a hypothesis accounting for the significance of expected inflation in money demand equations which is corroborated by an empirical investigation of the Italian experience, particularly suited for this specific experiment.     

An empirical note on bond-yield uncertainty and the demand for money

This paper empirically tests the effect of bond-yield uncertainty on the demand for money, as implied by the capital theory approach to the demand for money, suggested by Friedman and Tobin. It is expected that the demand for money is affected not only by the yield on bonds (which are a substitute asset), but it also in increasing function of their risk. The empirical tests, which employ two alternative measures of uncertainty (mean of squared deviations from the average, and the mean of squared deviation from a predictor obtained by exponential smoothing) seem to support the Friedman-Tobin hypothesis.     

Modelling money demand in open economies: the case of selected Asian countries

While early work on money demand estimation focused primarily on the importance of domestic variables, many studies in later years have suggested that foreign variables also influence the domestic demand for money in an open economy. With the rapid financial market liberalization in some of the Asian economies in the last couple of decades, open economy factors have become very important in the determination of money demand. Therefore, this paper aims to ascertain the degree to which foreign opportunity cost variables influence money demand in the Philippines, Singapore and South Korea. Cointegration analysis is performed and an error correction model estimated using quarterly time-series data. The empirical results support the inclusion of foreign opportunity cost variables in the money demand function.