International evidence on misspecification of the standard money demand equation

This paper tests the proposition that the interest rate in the standard money demand equation acts as a proxy for the expected change in interest rates. If this is true, the interest elasticity in the standard equation will depend on the expectations process for interest rates. Using cross-country data, we find that there does exist a relationship between the observed interest elasticity in the standard equation and the predictability of future interest rates from current interest rates.