Money Demand and Economic Uncertainty
AbstractThe author examines the impact of economic uncertainty on the demand for money. Using a general-equilibrium theory, he argues that in a world inhabited by risk-averse agents, who are constantly making portfolio decisions against a backdrop of macroeconomic uncertainty, the demand for money is a function of real income and interest rates, and an index of economic uncertainty. The author then uses the Johansen procedure of cointegration to estimate the long-run stationary relationships between a Canadian monetary aggregate (M1, M1++, and M2++) and the explanatory variables. Allowing for an index of economic uncertainty to enter the short-run dynamics of the estimated model, the author obtains empirical results that show that, in general, increased economic uncertainty leads, in the short run, to a rise in the desired M1 and M1++ balances that agents would like to hold. The impact of economic uncertainty on M2++ is, however, observed to be negative.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 04-25.
Length: 28 pages
Date of creation: 2004
Date of revision:
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Find related papers by JEL classification:
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-23 (All new papers)
- NEP-CBA-2004-08-23 (Central Banking)
- NEP-MAC-2004-08-23 (Macroeconomics)
- NEP-MON-2004-08-23 (Monetary Economics)
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