Forecasting money demand with Jorgenson's Lag and Tobin's q

The poor forecasting record of time-series money-demand equations is generally attributable to shifts in public behavior, to the omission of important arguments, and to the inadequate specification of the functional form of the relationship. This paper explores the latter two problems by deriving the demand function from Tobin's model of asset markets, by incorporating Tobin's “q” as an argument, and by basing the adjustment process on Jorgenson's rational distributed-lag model. These modifications produce reasonably stable equations that forecast well throughout the 1970s.