Short-run money demand

The conventional wisdom holds that the short-run demand for money is unstable. This paper challenges the conventional view by finding a stable demand for M1 in U.S. data from 1959 through 1993. The approach follows previous work in interpreting long-run money demand as a cointegrating relation, and it uses Goldfeld's partial-adjustment model to interpret short-run dynamics. The key innovation is the choice of the interest rate in the money demand function. Most previous work uses a short-term market rate, but this paper uses the average return on “near monies”—the savings accounts and money market mutual funds that are close substitutes for M1. This choice helps rationalize the behavior of money demand; in particular, the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies.     

The NOW account experiment and the demand for money

The authors use the NOW account experience in New England from 1972 to 1978 to estimate the responsiveness of the demand for money to interest payments on checkable accounts. Such an estimate is important in considering the effects on the demand for money of nationwide NOW's and of variations in interest rates on transactions balances in the future. With New England as the experimental region and the rest of the United States as a control group, the authors develop a cross-section, time-series framework to isolate and to estimate the interest rate responsiveness of money demand while accounting for effects of income, interest rates, and gradual adjustment.     

The role of money supply shocks in the short-run demand for money

Previous money-demand models are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible interest-rate fluctuations in response to innovations in nominal money. We propose a shock-absorber money- demand model in which money supply shocks affect the synchronization of asset transactions and so engender a temporary increase or decrease in desired money holdings. Expected changes do not engender such fluctuations in real money inventories. In simultaneous estimates for eight industrial countries, the shock-absorber model proved empirically superior.     

Monetary policy and commodity money equilibria

Commodity monies are thought to be desirable because of their ease-of-implementation and their generation of stable prices. This paper presents an investigation into these properties and a derivation of the restrictions commodity monies place on monetary policy. It is found that for commodity money systems to be feasible, monetary policy must follow a feedback rule which is a function of the growth rates for all asset stocks and in general a reduction in economic welfare accrues to agents in a commodity money economy. Moreover, the restrictions implied by a commodity money system are often inconsistent with existence of equilibrium.     

The demand for money in EEC countries

This paper examines the demand for money in the EEC countries and is focussed on five issues. First it starts form a common economic framework, which allows for shifts from M 2 to non-money assets and vice versa. Second, special attention is given to the dynamic structure of the statistical model in order to obtain meaningful conclusions on, e.g., the speed of adjustment of actual to optimal money holdings. Third, the study is entirely based on a uniform set of quarterly data for the eight countries concerned. Fourth, the paper presents a careful examination of the residuals and, finally, analyses the predictive behaviour of the estimated models. For all countries we found long-run income elasticities greater than unity and interest rate elasticities clustered around -0.20. The impact of inflation and the business cycle variable appeared to be significant in the majority of countries considered.     

Permanent income in the consumption and the demand for money functions

This paper examines whether the concept of permanent income relevant for consumption decisions is the same as the one relevant for cash balance decisions. The equivalence has often been assumed in theoretical and empirical work, but it has never been explicitly tested for, although some comparisons have been made. Using Canadian quarterly data, consumption and demand for money functions are estimated jointly. The results indicate that the hypothesis that the elasticity of income expectations is the same in the two functions cannot be rejected. This conclusion holds whether or not the same income variable is used in the two functions.     

Outside wealth,the demand for money and the crowding out effect

Policy simulations with most large macroeconometric models evidence little, if any, crowding out of private spending from debt financed increases in government expenditures. Examination of the structure of these models reveals that none allows for a wealth effect of debt finance on the demand for money, even though theoretical studies suggest that this wealth effect may cause significant crowding out. This paper provides empirical evidence that increases in government debt held by the public do increase the demand for money; therefore, the fiscal policy simulations of the large macroeconometric models may yield biased conclusions concerning the crowding out effect.     

A comment on the foundations of the precautionary demand for money

The model of the precautionary demand for money presented by Plessner and Reid (1980) is critically examined. It is shown that households derive no benefit from unscheduled consumption (in the model in question) and will therefore choose not to hold precautionary balances. Positive balances were obtained only by ensuring that scheduled consumption was chosen sub-optimally. However, this note confirms the Plessner-Reid hypothesis by explicitly modelling the benefits of unscheduled consumption.     

The precautionary demand for money: A rigorous foundation

Consumers' demand for money to hold is shown rigorously to be related to possible but uncertain purchase opportunities rather than to total consumption (income) or to the variability of bond yields. A formal model of consumers' demand for precautionary balances is analyzed. It implies that cash balances demanded will be changed by different amounts in response to equivalent changes in the rates of time preference and inflation. This perhaps explains recent instability in money demand estimates.     

The transactions demand for money in a two-currency economy

In this paper the model of the transactions demand for money of Baumol (1952) is extended to an economy where transactions are conducted in two currencies. The currency substitution hypothesis - that the domestic demand for domestic money depends on the expected rate of depreciation, as well as the domestic rate of interest and level of income - is derived from the model. In addition, several new insights into the implications of currency substitution are provided.     

Currency substitution, capital mobility and money demand

This paper re-examines the currency substitution (CS) issue by specifying a general portfolio balance (PB) model where domestic residents' demand for foreign money is distinguished from their demands for foreign non-monetary assets. The latter possibility, which reflects international capital mobility as opposed to CS per se, is already a key feature in the open-economy macro literature. The inclusion of foreign money leaves the usual asset demand functions unchanged (in the PB model that ignores CS), at least as far as the appropriate rate-of-return arguments and their signs are concerned. Although this suggests that CS is of limited importance in macro modelling, it implication for the estimation of money demand functions is pursued. An initial attempt is made to empirically isolate the separate efects of high capital mobility and currency substitution for Canada, Germany, the United Kingdom, and the United States. The results, while not conclusive due to high multicollinearity problems, bring into question the empirical as well as the theoretical relevance of currency substitution.     

Black-market exchange-rate expectations and the domestic demand for money: Some empirical results

This paper analyzes the effects of expectations about future exchange-rate adjustments on the demand for money. These effects are studied empirically for the case of countries which have imposed foreign-exchange restrictions. The results obtained for Brazil, Chile, and Colombia indicate that the demand for money is significantly reduced when expectations of black-market depreciation intensify; and that when this variable (for which the proxy used is the divergence of the black-market exchange rate from purchasing power parity) is omitted from the demand-for-money function, the response of the demand for money to changes in the expected rate of domestic inflation tends to be overestimated.     

The demand for money in the Italian economy: 1867–1965

This paper conducts an empirical analysis of the demand for money in Italy using data for the period 1867–1965. It finds that during this time this demand was a stable function of two key variables: permanent income and the rate of interest.     

Heterogeneous expectations and the demand for money and financial assets in an exchange economy

An unresolved problem is to explain adequately the role of money as an alternative to barter in a dynamic exchange economy. In particular, liquidity preference explanations fail to motivate, or to identify explicitly the productive ‘services’ of money. In this paper, information about exchange opportunities is assumed to be imperfect and unevenly distributed. Money is shown to have ‘peculiar’ properties which make it an asset of wide-spread social value. Thus, this paper blends the imperfect information approach of Brunner and Meltzer (1972) with the explicit analysis of liquidity preference of Tobin (1958).     

Investigating M3 money demand in the euro area

Euro area monetary growth has exceeded its target since 2001. Likewise, recent empirical studies did not find evidence in favour of a stable long-run money demand function. In contrast to the bulk of the literature, we are able to identify a stable long-run money demand relationship. This result is obtained when the analysis is done without the short run homogeneity restriction between money and prices. The basic equation can be improved by allowing for asymmetric adjustment. In a low inflation environment, opportunity costs of holding money have decreased. Thus, the apparent monetary overhang is reconciled within standard models.     

Precautionary money demand in a business-cycle model

Precautionary demand for money is significant in the data, and may have important implications for business-cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business-cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need. The resulting precautionary motive for holding money produces substantial improvements in accounting for business-cycle behavior of nominal variables, at no cost to real variables.     

A simplified portfolio analysis of the long-run demand for money in Australia

The paper derives the form of a money demand equation when money is explicitly considered as one element of a limited set of financial assets. The results from estimation of the portfolio model are compared with those from the typical single equation form and are superior in a number of respects. In contrast with the traditional model the impact equations of the portfolio model provide no evidence of serial correlation or parameter instability. Systems estimation provides for a much faster speed of adjustment than is in evidence with the traditional model. Estimation by ridge regression procedures to accomodate collinearity among the regressors further enhances this speed of adjustment.