Financial innovation and the long-run demand for money in the United Kingdom and in West-Germany

Financial Innovation and the Long-Run Demand for Money in the United Kingdom and in West Germany. — This paper uses a cointegration model to compare the long-run demand for broad money in the UK and (West) Germany during the period 1963Q1–1990Q2. In the long-run demand function for Germany, real M3 is determined in classical manner by real income and a single opportunity cost variable. By contrast, the UK demand function requires in addition an explicit own rate on money as well as a risk variable. The income elasticity is also very high. These differences reflect the more rapid pace of financial innovation in the UK in the 1970s and 1980s.     

Money growth volatility and the demand for money in Germany: Friedman’s volatility hypothesis revisited

Money Growth Volatility and the Demand for Money in Germany: Friedman’s Volatility Hypothesis Revisited. — Recently, the Bundesbank claimed that monetary targeting has become considerably more difficult by the increased volatility of short-term money growth. The present paper investigates the impact of German money growth volatility on income velocity and money demand in view of Friedman’s money growth volatility hypothesis. Granger-causality tests provide some evidence for a velocity/volatility linkage. However, the estimation of volatility-augmented money demand functions reveals that — in contrast to Friedman’s hypothesis — increased money growth volatility lowered the demand for money.     

The stability of money demand in Germany and in the EMS: Impact of German unification

The Stability of Narrow Money Demand in Germany and Aggregate Money Demand in the EMS: Impact of German Unification. —This paper shows that the German monetary union not only had an impact on the stability of the narrow money demand in Germany but also on the stability of the aggregate demand for money in two larger European currency areas, consisting of three and seven EMS countries. However, the impact was only of a temporary nature. The empirical results show that the close link between real money, output, and the interest rate still exists. In a European Monetary Union, narrow money thus remains a potential candidate as an indicator and/or intermediate target for the European Central Bank.     

China's money demand in a cointegrating vector error correction model

This paper estimates open-economy macroeconomic models of the Chinese economy allowing for the structural change caused by the 1992 reforms. Unrestricted vector autoregressions, VARs, and cointegrating vector error correction models, VECMs, are estimated on quarterly data for the early reform period 1980–1992, and the late reform period, 1993–2018. Two long-run cointegrating vectors are identified, which can be interpreted as a long-run, money demand function and a long-run IS type income equation driven by export demand. The 1992 reforms involved a move to a more market oriented system and a transformation of financial institutions and this seems to be responsible for a change in the direction of effect of interest rates in both the IS and LM relationships.     

The stability of German money demand: Tests of the cointegration relation

The Stability of German Money Demand: Tests of the Cointegration Relation. — In this study, two money demand functions are specified in single equation error correction as well as triangular error correction form involving real M1 (M3), real GNP, a short-and a long-term interest rate. Using various tests, it is shown that there may be a cointegration relation even after the German Monetary Union (GMU) was established in 1990. But the long-run coefficients of GNP and the interest rate probably have a structural break in 1973, when the Bundesbank changed its monetary regime, and in 1990, when the GMU was formed. The tests support weak exogeneity of real GNP and the interest rate.     

Financial repression, money growth, and seignorage: The Polish experience

Financial Repression, Money Growth and Seignorage: The Polish Experience. — A small analytical framework is developed to analyze the relation between reserve requirements, base money growth and seignorage revenues. From the analysis, the authors can derive of steady-state seignorage revenues as a function of the rate of money growth and the intensity of financial repression. The framework is applied to the case of Poland that has undertaken a rapid transition to a market economy and implemented a substantial financial sector reform. The process of financial sector reform in Poland is discussed and estimates of the currency demand and deposit demand functions are undertaken to derive the seignorage Laffer curve.     

EU-wide money and cross-border holdings

EU-Wide Money and Cross-Border Holdings. —The paper explores the economic properties of several measures of EU-wide money that include different definitions of cross-border holdings (CBHs). ‘Very broad’ aggregates are poorly linked with EU-wide income and price developments; in contrast, the demand for aggregates which is ‘focused on the European Union’ (which hinge on the inclusion of CBHs denominated in EU currencies and/or kept within the EU) is shown to be stable and predictable. Although aggregates extended to include CBHs do not yet outperform the traditional measure of broad money, they are likely to become an increasingly important tool for monetary analysis at the EU level.     

Financial innovations and the interest elasticity of money demand: Evidence from an error correction model

The difficulty of estimating a stable money demand function has been blamed on financial innovations of the past two decades. Gurley and Shaw's [1960] thesis implies that a proliferation of money-like assets resulting from financial innovations increased the interest elasticity of money demand. However, Hafer and Hein [1984] provided empirical evidence to the contrary. This paper presents the empirical results of the M2 demand for money using an error correction model for the period 1959:1–87:4 and two subperiods 1959:1–73:4 and 1974:1–87:4. The findings suggest lower interest and price elasticities for money demand in the second sample in which money substitutes proliferated.     

The demand for M3 and inflation forecasts: An empirical analysis for Switzerland

The Demand for M3 and Inflation Forecasts: An Empirical Analysis for Switzerland. — This paper argues that money should continue to play an important role in monetary policy even if a central bank pursues a strategy based on inflation forecasts. Within the context of an error correction model, the paper delivers empirical evidence that both the growth rate of the monetary aggregate M3 and the size of excess M3 incorporate useful information with regard to future inflation in Switzerland. This evidence strongly suggests that money should remain an important indicator for monetary policy.     

Endogenous policy,structural shift,and demand for money

Zusammenfassung Endogene Politik, Strukturver?nderungen und die Geldnachfrage.- Dieser Artikel soll die Geldnachfrage-Gleichung überprüfen, die ursprünglich Goldfeld anhand der viertelj?hrlichen US-Daten der Periode 1955–1978 ermittelte. Die Ergebnisse verschiedener Sch?tzmethoden und Spezifikationstests deuten darauf hin, da\ Goldfelds Geldnachfrage-Gleichung falsch spezifiziert ist. Das l?\t sich trotz einiger gegenteiliger Behauptungen weder auf eine unzureichende dynamische Spezifikation noch auf die nur konventionelle Berücksichtigung von Autokorrelation zurückführen. Vielmehr müssen die Annahmen, Zinss?tze seien exogen und die Struktur sei konstant, zurückgewiesen werden. Eine Zinsreaktionsfunktion unter Verwendung der wichtigsten makroókonomischen Zielvariablen bei verzógerter Reaktion der Zinsen tr?gt in der Tat dazu bei, die Goldfeldsche Geldnachfragefunktion zu verbessern.

---

Résumé Politique endogène, changement structurel et la demande de monnaie. - Le but de cet article est de revoir l’équation de la demande de monnaie suggérée la première fois par Goldfeld en utilisant les données trimestrielles des E.U. pour la période 1955Q1-1978Q4. Les résultats dérivés des méthodes différentes d’estimation et des tests de spécification différents indiquent que l’équation de la demande de monnaie de Goldfeld souffre d’une spécification fausse. Nonobstant quelques opinions contraires cela semble résulter ni d’une spécification dynamique impropre ni d’une estimation conventionnelle en terme d’un ajustement d’autocorrélation. Au contraire, il faut refuser les suppositions que des taux d’intérêt soient exogènes et que la structure soit stable. La spécification d’une fonction de réaction de taux d’intérêt en terme des principales variables de but macroéconomiques et du taux d’intérêt retardé contribue à améliorer la fonction de demande de monnaie à la Goldfeld.

---

Resumen Politica endógena, cambio estructural y demanda de dinero. - El objeto de este trabajo es reevaluar la ecuación de demanda de dinero sugerida originalmente por Goldfeld utilizando datos trimestrales correspondientes al período 1955–1978. Los resultados obtenidos por diferentes métodos y los tests de especificación indican que la ecuación de demanda de dinero de Goldfeld no esta adecuadamente especificada. A la conclusion contraria no se llega ni partiendo de una especificación dinámica, que no sería apropiada, ni ajustando los resultados de la estimación convencional por autocorrelación. En cambio se rechaza el supuesto de exogeneidad de la tasa de interés y el de estabilidad estructural. La especificación de la tasa de interés como función de reacción de las variables macroeconómicas más importantes y de la tasa de interés desfasada contribuye a mejorar la función de demanda de dinero de Goldberg.

     

De-monetisation, inflation and coffee: the demand for money in Uganda

This paper investigates the recent macroeconomic history ofUganda using time series models for the demand for the threemain monetary aggregates. A collapse of income and high inflationled to de-monetisation. The flight from currency and demanddeposits was limited by their use for transactions, but demandfor time and savings deposits was largely a function of inflation.The role of the exchange rate and the price of coffee in determiningan asset demand for money was mixed. Re-monetisation since thelate 1980s has been slower than de-monetisation.     

The demand for money in the Netherlands revisited

Summary This article presents an analysis of demand for money in The Netherlands, both at the aggregate level and the sectoral level. Special attention is devoted to the distinction between short and long run demand. Deviations of the long-run relationships are modelled by means of the error correction mechanism. The elasticities for aggregate demand are consistent with the findings for the money demand by the household and business sectors and correspond reasonably well with those derived from other studies. The estimated equations describe the rise in theM1- andM2-ratio in the 1980s in a satisfactory way, although forM2 from 1987 onwards there is a discrepancy between actual and fitted values. The disaggregated analysis shows that the behaviour of the business sector seems to be responsible for this.The authors are indebted to Professor S.K. Kuipers for his comments on an earlier draft.     

Money demand in China and time-varying cointegration

Many studies analyze the money demand using a (fixed coefficient) cointegrating regression model, which may not be appropriate to deal with the money demand of a transition economy like China. This paper investigates this issue using a time-varying cointegration approach based on the quarterly data from 1996 to 2009. We find some interesting results: (i) the estimates of the income elasticities are between 0.60 and 0.75, which are comparable with the previous studies; (ii) the estimated interest rate elasticity supports the argument that the overall effect of the interest rate on the money holding is weak although there are some mild evidences that it has been strengthened in recent years; (iii) the substitution effect of equity asset dominates the wealth effect, especially, during the bullish market period. Our result is robust to the alternative choices of the scale or opportunity cost variables and shows that omission of the stock prices in the money demand function would possibly yield a misspecification problem.     

Forecasting the Euro exchange rate using vector error correction models

Forecasting the Euro Exchange Rate Using Vector Error Correction Models. — This paper presents an exchange rate model for the Euro exchange rates of four major currencies, namely the US dollar, the British pound, the Japanese yen and the Swiss franc. The model is based on the monetary approach of exchange rate theory which uses fundamental macroeconomic variables to explain the exchange rate. A crucial point when using such a model is its proper estimation through cointegration analysis. The euro exchange rate model is therefore estimated in the form of a Vector Autoregressive (VAR) model with cointegrating vectors (VECM). We find that when cointegration analysis is undertaken properly, the naive random walk prediction can be out-performed for the US dollar, the British pound and the Japanese yen, but not for the Swiss franc.     

A re-examination of the demand for money in Nigeria

Summary and Conclusion This paper reexamines the demand for money in Nigeria and finds the real income and the expected rate of inflation to be important independent variables that explain over 80 percent of the variation in the real cash balance. The study shows that, in view of the low per capita income of Nigerians, permanent income and measure income are largely the same. An important finding of this study is that, because their price level is (in large part) exogenously determined, the monetary authorities in Nigeria should be more desirous of following the constant growth rate rule. A very substantial part of the country's export (that is, oil) is especially prone to inflationary pressures due to the ease with which international inflation can be transmitted. Since the authorities can control money stock, this ‘rule’ is indicated from both the theoretical and the empirical standpoint.