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The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector

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  • Ryland Thomas

Abstract

This paper is the second part of a study on the determinants of the broad money aggregate M4, following a similar analysis of the personal sector developed in Working Paper No 61. It models the broad money holdings of both industrial and commercial companies (ICCs) and other financial institutions (OFIs) in the UK, and examines what role they play in the transmission mechanism. ICCs are shown to have both a transactions and a portfolio motive for holding money. A three-equation model of money, investment and the cost of capital is estimated, and the results suggest the existence of a corporate sector liquidity channel whereby firms' "excess" money balances have a negative influence on the cost of capital and a positive impact on investment spending. OFIs' money holdings are shown to depend upon wealth and relative rates of return, in line with standard portfolio models of money demand. But as OFIs are the chief counterparts to banks' liability management activity, their money holdings are also modelled jointly with deposit rates.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1997/wp62.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 62.

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Date of creation: Jun 1997
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Handle: RePEc:boe:boeewp:62

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  1. Urbain, Jean-Pierre, 1992. "On Weak Exogeneity in Error Correction Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(2), pages 187-207, May.
  2. Urbain, Jean-Pierre, 1995. "Partial versus full system modelling of cointegrated systems an empirical illustration," Journal of Econometrics, Elsevier, vol. 69(1), pages 177-210, September.
  3. Neil R. Ericsson, 1994. "Conditional and structural error correction models," International Finance Discussion Papers 487, Board of Governors of the Federal Reserve System (U.S.).
  4. Mizen, Paul, 1996. "Modeling the demand for money in the industrial and commercial companies sector in the United Kingdom," Journal of Policy Modeling, Elsevier, vol. 18(4), pages 445-467, August.
  5. Mark S Astley & Andrew G Haldane, 1995. "Money as an Indicator," Bank of England working papers 35, Bank of England.
  6. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, vol. 91(361), pages 106-21, March.
  7. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September.
  8. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
  9. Drake, Leigh & Chrystal, K Alec, 1994. "Company-Sector Money Demand: New Evidence on the Existence of a Stable Long-Run Relationship for the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 479-94, August.
  10. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
  11. Ireland, Jonathan & Wren-Lewis, Simon, 1992. "Buffer Stock Money and the Company Sector," Oxford Economic Papers, Oxford University Press, vol. 44(2), pages 209-31, April.
  12. Bardsen, G. & Fisher, P.G., 1993. "The Importance of Being Structured," Papers 02-93, Norwegian School of Economics and Business Administration-.
  13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  14. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
  15. Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
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Cited by:
  1. Colin Ellis, 2006. "Elasticities, markups and technical progress: evidence from a state-space approach," Bank of England working papers 300, Bank of England.
  2. K Alec Chrystal & Paul Mizen, 2001. "Consumption, money and lending: a joint model for the UK household sector," Bank of England working papers 134, Bank of England.
  3. K. Alec Chrystal & Paul Mizen, 2005. "Other financial corporations: Cinderella or ugly sister of empirical monetary economics?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 63-80.
  4. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
  5. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2007. "The sectoral distribution of money supply in the Euro area," Temi di discussione (Economic working papers) 627, Bank of Italy, Economic Research and International Relations Area.
  6. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
  7. Norbert Janssen, 1998. "The demand for M0 in the United Kingdom reconsidered: some specification issues," Bank of England working papers 83, Bank of England.
  8. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.

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