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Stability of the Demand for M1 and Harmonized M3 in Finland

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  • Ripatti, Antti

    ()
    (Bank of Finland Research)

Abstract

We derive a theoretical model for the demand for money using the money-in-the-utility-function approach. The steady-state – utility function – parameters of the model of narrow money (M1) estimated with cointegration techniques are stable over the foreign exchange rate regime shift; whereas in the model of harmonized M3 (M3H) they are not stable. The theoretical model fits the M1 data. The adjustment cost parameters of the M1 model describing the dynamics of the demand for money are stable over the sample period. The adjustment cost parameters of the M3H model are not stable. These results suggest that from the Finnish point of view M1 would be a more appropriate intermediate target for monetary policy than harmonized M3.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/DP_18_1996.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 18/1996.

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Length: 33 pages
Date of creation: 04 Sep 1996
Date of revision:
Handle: RePEc:hhs:bofrdp:1996_018

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: money-in-the-utility-function model; structural breaks; demand for money; narrow money; harmonized M3;

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Cited by:
  1. Budina, Nina & Maliszewski, Wojciech & de Menil, Georges & Turlea, Geomina, 2006. "Money, inflation and output in Romania, 1992-2000," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 330-347, March.
  2. Ripatti, Antti & Saikkonen, Pentti, 1998. "Cointegrated Vector Autoregressive Processes with Continuous Structural Changes," Research Discussion Papers 29/1998, Bank of Finland.
  3. Browne, F.X. & Fagan, G. & Henry, J., 1997. "Money Demand in EU Countries : A Survey," Papers 7, European Monetary Institute.
  4. Felmingham, B. & Zhang, Q., 2000. "The Long Run Demand for Broad Money in Australia Subject to Regime Shifts," Papers 2000-07, Tasmania - Department of Economics.
  5. Thórarinn G. Pétursson, 2001. "The representative household's demand for money in a cointegrated VAR model," Economics wp12, Department of Economics, Central bank of Iceland.
  6. Inagaki, Kazuyuki, 2009. "Estimating the interest rate semi-elasticity of the demand for money in low interest rate environments," Economic Modelling, Elsevier, vol. 26(1), pages 147-154, January.
  7. Felmingham, Bruce & Zhang, Qing, 2001. "The Long Run Demand For Broad Money in Australia Subject to Regime Shifts," Australian Economic Papers, Wiley Blackwell, vol. 40(2), pages 146-55, June.
  8. Kia, Amir & Darrat, Ali F., 2007. "Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability," Global Finance Journal, Elsevier, vol. 18(1), pages 104-123.

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