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Endogenous financial innovation and the demand for money

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  • Peter N. Ireland

Abstract

This paper embeds two key ideas about the nature of financial innovation taken from the empirical literature into a familiar equilibrium monetary model. It provides formal support for several alternative econometric specifications for money demand that attempt to capture the effects of financial innovation and demonstrates that a popular theoretical model of money demand, when suitably modified, can account for some unusual monetary dynamics found in the data. Thus, it helps to establish both the theoretical relevance of recent empirical work and the empirical relevance of recent theoretical work on the demand of money.

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File URL: http://www.richmondfed.org/publications/research/working_papers/1992/wp_92-3.cfm
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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 92-03.

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Date of creation: 1992
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Handle: RePEc:fip:fedrwp:92-03

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Keywords: Money theory ; Financial services industry;

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References

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  1. Jared Enzler & Lewis Johnson & John Paulus, 1976. "Some Problems of Money Demand," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 261-282.
  2. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
  3. John V. Duca, 1992. "The case of the missing M2," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 1-24.
  4. John B. Carlson & Sharon E. Parrott, 1991. "The demand for M2, opportunity cost, and financial change," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-11.
  5. Michael Dotsey, 1984. "An investigation of cash management practices and their effects on the demand for money," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 3-12.
  6. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  7. Donald D. Hester, 1981. "Innovations and Monetary Control," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 141-200.
  8. Lieberman, Charles, 1977. "The Transactions Demand for Money and Technological Change," The Review of Economics and Statistics, MIT Press, vol. 59(3), pages 307-17, August.
  9. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
  10. Phillip Cagan & Anna J. Schwartz, 1987. "Has the Growth of Money Substitutes Hindered Monetary Policy?," NBER Chapters, in: Money in Historical Perspective, pages 209-233 National Bureau of Economic Research, Inc.
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