Endogeneity in European money demand

European wide monetary aggregates constructed from pre-unification data cannot be used as evidence that money demand in the euro area is stable. To overcome the Lucas critique, we apply the standard foreign exchange rate model. Since the uncoordinated country specific money supply system is abolished, the increased comovement between local monetary aggregates leaves little room for a free ride on the law of large numbers. Current monetary policy decisions must be based on untested relations, and given ‘the long and variable lags’, we conclude that the road towards monetary stability is a non-activist steady money supply policy.     

Wealth and the demand for money in the European Union

This study presents the results of an empirical analysis of the demand for money in the European Union as a whole over the period 1971–1995, with a particular focus on the impact of financial wealth. The empirical evidence shows a substantial impact of wealth on the demand for M2 and M3, whereas no influence of wealth on the demand for M1 is found. This finding may explain the remarkable increase of the broad monetary aggregates over the last decade or so. This means that taking into account the growth of wealth, the monetary expansion has been fairly modest. The evidence thus indicates that the strong increase of M2 and M3 should be attributed to portfolio investment considerations rather than to an expansionary monetary policy.Helpful comments by two anonymous referees, the participants in the Workshop on Money Demand at the Humboldt Universität and Hans Lunsing gratefully acknowledged.     

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.     

Financial innovation and demand for money: some empirical evidence

Recent criticism of money growth targets has been based on the implications of spreading financial innovation, since the latter has been considered to undermine monetary policy effectiveness both by bringing about an increase in the interest elasticity of money demand and by producing instability of the money demand function. The empirical results presented in this paper – focusing on a single and specific case of financial innovation particularly suited to study the isssue at stake – falsify both hypotheses.     

On the short-run and long-run demand for money

This paper makes precise the relationships between short-run and long-run demand for money, using methods commonly employed in growth models. It estimates these demand functions with quarterly French data and tests the validity in France of the modern version of the quantity theory of money. The effects of inflation on the demand for money are studied both in the short run and the long run. The speed of adjustment of money balances towards their long-run level is measured.     

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.     

On the demand for money in the United States

One of the current issues in the literature on the demand for money is whether the adjustment of actual to desired money holdings is in real or nominal terms. This paper tests the real against the nominal adjustment hypothesis using United States data. Comparisons are made among simple sum and Divisia aggregates (of M1, M2, M3, and L) and with Spindt's monetary velocity (MQ) aggregate. The results strongly support the nominal adjustment hypothesis, but they do not reveal a single uniformly best monetary aggregate.     

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.     

The demand for relational goods: empirical evidence from the European Social Survey

How are happiness and the demand for relational goods and status goods related? Using cross-sectional data from the European Social Survey, this relationship is investigated for European countries. The main result is that the demand for relational goods is not reduced by high opportunity costs of time. Rather, both wage rate and income are positively related to the frequency of social contacts. In contrast to financial means, while status is more important for happiness in richer European countries than in poorer ones, social status is not decisive for the frequency of meeting friends regardless of the home country’s economic well-being. Thus, while no crowding out of relational contacts by status could be observed, relational goods are even boosted by material well-being.     

The transactions trust demand for money

An exchange economy using gold as a means of payment is considered where it is possible to borrow gold in a money market. A positive money rate of interest is encountered as the shadow price of the capacity constraint in an economy without enough gold. The meaning of enough gold and the role of the default penalty are noted in the determination of the interest rate.Revised from Enough Gold in a Society Without and With Moneylenders, CFDP No. 753. The author gratefully acknowledges the support of the Aequus Institute.     

The demand for money in Austria

In this paper, the demand for real money M1, M2, and M3 is estimated for Austria over the time period 1965–96. The modelling takes place within the framework of a small vector autoregression. To estimate the demand for money, two-equation error-correction models are constructed, which contain the short-run dynamics and the long-run economic equilibrium. It is found that a stable money demand exists for all monetary aggregates. The long-run equilibrium of M1, after accounting for a structural break in 1979, can be characterised as a classical type of money demand, with no interest rate effects and an elasticity of one for real GDP. In the case of M2 and M3, we find a unit coefficient on income and a significantly negative influence of a long-term interest rate. The statistical properties of the estimated short-run money demand equations – considering in-sample and out-of-sample tests – are generally very good. First version received: October 1996/Final version received: April 2000     

Distribution effects and the business demand for money

This paper examines whether and how changes in an industry's firm-size distribution affect the per-firm demand for money. The size distribution of an industry potentially affects the demand for money through several channels. We examine four of those channels: 1) economies of scale; 2) decentralization in cash management; 3) cost of credit; and 4) compensating balances. We conclude that increasing the size inequality increases the industry's per-firm demand for money.     

A note on the speculative demand for money

In the General Theory, Keynes argued that expectations about future bond prices tend to be “sticky”. A rise in bond prices causes more investors to “join the bear brigade” and so increases the aggregate demand for money. Since Tobin's classic article on liquidity preference, this explanation of the downward sloping demand for money curve has largely disappeared from the literature. This note introduces sticky expectations into the Tobin framework. It shows that the existence of such stickiness does not necessarily cause the demand for money to be more elastic because investors have expectations about the variance of future bond prices as well as about their mean. A sufficient condition for a more elastic demand for money under sticky expectations is that the Pratt-Arrow coefficient of relative risk aversion be either constant or decreasing in wealth.     

Inflation and the demand for money in Israel

This paper examines the impacts of rational-price expectations and foreign-exchange reform, in addition to adaptive-price expectations, on money-demand in Israel. The regression results are used to determine the upper limit on the amount of seigniorage.     

Post Keynesian endogenous money theory: A theoretical and empirical investigation of the credit demand schedule

The article investigates the relationship between interest rates and loan amounts provided by commercial banks from both a theoretical and an empirical perspective. Theoretically, some scholars belonging to the post Keynesian endogenous money tradition advocate that a decrease (increase) in interest rates leads to a positive (negative) effect on the amount of loans demanded by households and firms. On the other hand, some heterodox economists maintain that interest rates do not stimulate firms’ credit demand but that a certain degree of influence is allowed for loans provided to households. By applying a vector autoregression (VAR) and vector error-correction model (VECM) methodology to European Central Bank and Organisation for Economic Co-operation and Development data for the eurozone, this article proposes an empirical validation of such theoretical premises by analysing the relationship between the different types of credit provided by commercial banks and the corresponding interest rates. The main results show a negative relationship between the interest rates and the credit provided for the purchase of houses. Conversely, no significant relationship is found between loans granted to enterprises and loans for the purchase of consumption goods and the corresponding interest rates.     

Leakages from the money demand function

The performance of alternative scale variables is explored in a simple demand function for narrow money. Sequential test establish consumers' expenditure as the preferred measure. The implications for fiscal policy and the paradox of thrift are outlined.     

Specific complements and the demand for money in Australia

Clements and Nguyen, using Australian data, found that money, durables, and other consumption are specific complements. This letter applies a Nasse-type model to the same data and describes the associated preference independence transformation in order to interpret the results.