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Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity

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Author Info
Gillman, Max () (Cardiff Business School)
Otto, Glen

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Abstract

The 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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File URL: http://www.cardiff.ac.uk/carbs/econ/workingpapers/papers/E2006_24.pdf
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Publisher Info
Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/24.

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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
Handle: RePEc:cdf:wpaper:2006/24

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Blackwell Publishing, vol. 19(1), pages 113-136, 02. [Downloadable!] (restricted)
  2. Gillman, Max & Kejak, Michal, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Cardiff Economics Working Papers E2005/15, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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