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Short-run money demand

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  • Ball, Laurence

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 7 ()
Pages: 622-633

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Handle: RePEc:eee:moneco:v:59:y:2012:i:7:p:622-633

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  2. Dennis Hoffman & Robert H. Rasche, 1989. "Long-run Income and Interest Elasticities of Money Demand in the United States," NBER Working Papers 2949, National Bureau of Economic Research, Inc.
  3. William Poole, 1987. "Monetary Policy Lessons of recent Inflation and Disinflation," NBER Working Papers 2300, National Bureau of Economic Research, Inc.
  4. John B. Carlson & Susan M. Byrne, 1992. "Recent behavior of velocity: alternative measures of money," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-10.
  5. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
  6. Baba, Yoshihisa & Hendry, David F & Starr, Ross M, 1992. "The Demand for M1 in the U.S.A., 1960-1988," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 25-61, January.
  7. Friedman, Benjamin M, 1988. "Lessons on Monetary Policy from the 1980s," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 51-72, Summer.
  8. Duca, John V, 2000. "Financial Technology Shocks and the Case of the Missing M2," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(4), pages 820-39, November.
  9. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
  10. Hoffman, Dennis L. & Rasche, Robert H. & Tieslau, Margie A., 1995. "The stability of long-run money demand in five industrial countries," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(2), pages 317-339, April.
  11. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(1), pages 31-44, February.
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  13. John P. Judd & John L. Scadding, 1982. "The search for a stable money demand function: a survey of the post- 1973 literature," Working Papers in Applied Economic Theory 109, Federal Reserve Bank of San Francisco.
  14. Dutkowsky, Donald H & Cynamon, Barry Z, 2003. " Sweep Programs: The Fall of M1 and Rebirth of the Medium of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(2), pages 263-79, April.
  15. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
  16. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  17. Robert L. Hetzel, 1989. "M2 and monetary policy," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 14-29.
  18. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 137-167, January.
  19. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 783-820, July.
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Cited by:
  1. Jess Benhabib & Stephanie Schitt-Grohe & Martin Uribe, 2002. "Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability," PIER Working Paper Archive 03-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 14 Feb 2003.
  2. Marcus Scheiblecker, 2012. "Modelling Short-run Money Demand for the USA," WIFO Working Papers, WIFO 442, WIFO.
  3. Marcus Scheiblecker, 2012. "Between Cointegration and Multicointegration. Modelling Time Series Dynamics by Cumulative Error Correction Models," WIFO Working Papers, WIFO 431, WIFO.
  4. Sosunov, K., 2013. "Estimation of the Money Demand Function in Russia," Journal of the New Economic Association, New Economic Association, New Economic Association, vol. 18(2), pages 89-99.
  5. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
  6. Kirill Sosunov, 2012. "Estimation of the Money Demand Function in Russia," HSE Working papers WP BRP 20/EC/2012, National Research University Higher School of Economics.

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