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Inflation uncertainty and money demand

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  • Matthew Higgins
  • Shohreh Majin

Abstract

We enter inflation uncertainty into error-correction models (EC) of US M1 and M2 money demand. We estimate the models using an instrumental variables procedure that is robust to mis-specification of inflation uncertainty. We find inflation uncertainty has a negative effect on M1 demand and a positive effect on M2 demand. Our results suggest that when confronted with increased inflation uncertainty, agents substitute away from M1 and to the interest bearing components of M2.

Suggested Citation

  • Matthew Higgins & Shohreh Majin, 2009. "Inflation uncertainty and money demand," Applied Economics Letters, Taylor & Francis Journals, vol. 16(13), pages 1323-1328.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:13:p:1323-1328
    DOI: 10.1080/13504850701452023
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    Cited by:

    1. Muhammad Akbar, 2023. "Effects of inflation uncertainty and exchange rate volatility on money demand in Pakistan: Bayesian econometric analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1470-1487, April.
    2. Ingrid Groessl & Artur Tarassow, 2015. "A Microfounded Model of Money Demand Under Uncertainty, and some Empirical Evidence," Macroeconomics and Finance Series 201504, University of Hamburg, Department of Socioeconomics, revised Jan 2018.
    3. Pei-Tha Gan, 2019. "Economic uncertainty, precautionary motive and the augmented form of money demand function," Evolutionary and Institutional Economics Review, Springer, vol. 16(2), pages 397-423, December.
    4. Afsin Sahin & Volkan Ulke, 2015. "Farkli Belirsizlik Duzeylerinde Faiz Oraninin Makroekonomik Degiskenlere Etkileri : Turkiye Uzerine Etkilesimli Vektor Otoregresif Modeli Uygulamasi," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(1), pages 65-93.

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