Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity
AbstractThe paper presents and tests a theory of the demand for money that is derived from a general equilibrium, endogenous growth economy, which in effect combines a special case of the shopping time exchange economy with the cash-in-advance framework. The model predicts that both higher inflation and financial innovation - that reduces the cost of credit - induce agents to substitute away from money towards exchange credit. The implied interest elasticity of money demand rises with the inflation rate and financial innovation rather than being constant as is typical in shopping time specifications. Using quarterly data for the US and Australia, we find evidence of cointegration for the money demand model. This money demand stability results because of the extra series that capture financial innovation; included are robustness checks and comparison to a standard money demand specification.
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Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/24.
Length: 32 pages
Date of creation: Sep 2006
Date of revision: Oct 2006
Publication status: Published in Quantitative and Qualitative Analysis in Social Sciences (QASS). Vol. 1 (1), Spring, 2007, 1-25, http://www.qass.org.uk/2007/vol1_1/p1-gillman_07_apr2.pdf
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Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-07 (All new papers)
- NEP-CBA-2006-10-07 (Central Banking)
- NEP-DGE-2006-10-07 (Dynamic General Equilibrium)
- NEP-FMK-2006-10-07 (Financial Markets)
- NEP-MAC-2006-10-07 (Macroeconomics)
- NEP-MON-2006-10-07 (Monetary Economics)
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- Gillman, Max & Kejak, Michal, 2008. "Inflation, Investment and Growth: a Banking Approach," Cardiff Economics Working Papers E2008/18, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2008.
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