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.