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How Endogenous Is Money? Evidence from a New Microeconomic Estimate

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  • David Cuberes

    ()
    (Dpto. Fundamentos del Análisis Económico)

  • William R. Dougan

    (Clemson University)

Abstract

This paper uses microeconomic data on firms' money demand and investment in physical capital for the period 1983-2006 to estimate the extent to which variation in the U.S. money supply is an endogenous response to variation in firms' demand for liquidity. We estimate a simple model in which each firm's desired money balances in any period depend on that firm's current transactions, current investment, and its planned future investment, as well as aggregate variables such as interest rates and common policy forecasts. Calculations based on our estimates suggest that only a very small fraction of the variability in the aggregate stock of money represents an endogenous response to autonomous changes in firms' investment plans.

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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2010-08.

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Length: 34 pages
Date of creation: Mar 2010
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2010-08

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Keywords: Money demand; money supply; endogenous money; monetary neutrality;

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  1. Litterman, Robert B & Weiss, Laurence M, 1985. "Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data," Econometrica, Econometric Society, vol. 53(1), pages 129-56, January.
  2. Coleman, Wilbur John, II, 1996. "Money and Output: A Test of Reverse Causation," American Economic Review, American Economic Association, vol. 86(1), pages 90-111, March.
  3. Cuberes, David & Dougan, William, 2009. "How Endogenous Is Money? Evidence from a New Microeconomic Estimate," MPRA Paper 17744, University Library of Munich, Germany.
  4. Antoni Cunyat & Randolph Sloof, 2008. "Employee Types and Endogenous Organizational Design," Tinbergen Institute Discussion Papers 08-019/1, Tinbergen Institute.
  5. Maliar, Lilia & Maliar, Serguei & Valli, Fernando, 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 42-49, January.
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  7. Freeman, Scott & Huffman, Gregory W, 1991. "Inside Money, Output, and Causality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 645-67, August.
  8. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1061-79, October.
  9. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-57, May.
  10. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  11. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  12. Martin Menner, 2009. "The role for search frictions for output and inflation dynamics: A Bayesian assessment," Working Papers. Serie AD 2009-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  13. Francesco Turino, 2009. "Non-price Competition, Real Rigidities and Inflation Dynamics," Working Papers. Serie AD 2009-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  14. Robert G. King & Charles I. Plosser, 1982. "The Behavior of Money, Credit, and Prices in a Real Business Cycle," NBER Working Papers 0853, National Bureau of Economic Research, Inc.
  15. José J. Sempere Monerris & Rafael Moner Colonques & Amparo Urbano Salvador, 2010. "Trade liberalization in vertically related markets," Working Papers. Serie AD 2010-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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