Buffer Stock Models of the Monetary Sector

Modelling the monetary sector has long been seen as problematic. Conventional demand for money functions have typically failed to cope with the experience of the past 15 years (Judd and Scadding, 1982) and models based upon the counterparts to monetary growth have fared little better. The current interest in buffer stock money (see Cuthbertson and Taylor, 1987, for a recent survey) can be seen as a response to the failure of the more traditional approaches. We believe that the issues involved in the empirical implementation of the buffer stock hypothesis are subtle and that the literature to date has not dealt with them satisfactorily. In spite of the substantial difficulties involved, we think that a system approach to buffer stock modelling (for example, Davidson, 1987a) may be unavoidable to ensure theoretical consistency.