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The Role of Money Supply Shocks in the Short-Run Demand for Money

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Author Info
Jack Carr
Michael R. Darby

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Abstract

Previous models of the demand for money are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible fluctuations in interest rates in response to unexpected changes in the nominal money supply. This paper proposes a shock-absorber model of money demand in which money supply shocks affect the synchronization of purchases and sales of assets and so engender a temporary desire to hold more or less money than would otherwise be the case. Expected changes in nominal money do not cause fluctuations in real money inventories. The model is simultaneously estimated for the United States, United Kingdom, Canada, France, Germany, Italy, Japan, and the Netherlands using the postwar quarterly data set and instruments used in the Mark III International Transmission Model. The shock-absorber variables significantly improve the estimated short-run money demand functions in every case.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0524.

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Date of creation: Dec 1981
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Handle: RePEc:nbr:nberwo:0524

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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. Gibson, William E, 1970. "Interest Rates and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 78(3), pages 431-55, May-June. [Downloadable!] (restricted)
  2. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-80, August. [Downloadable!] (restricted)
  3. Darby, Michael R, 1972. "The Allocation of Transitory Income Among Consumers' Assets," American Economic Review, American Economic Association, vol. 62(5), pages 928-41, December. [Downloadable!] (restricted)
  4. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  5. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April. [Downloadable!] (restricted)
  6. Edgar L. Feige, 2005. "Expectations And Adjustments In The Monetary Sector," Macroeconomics 0502005, EconWPA. [Downloadable!]
  7. Michael R. Darby, 1974. "Rational Expectations Under Conditions of Costly Information," UCLA Economics Working Papers 045, UCLA Department of Economics. [Downloadable!]
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  8. Michael R. Darby & Alan C. Stockman, 1980. "The Mark III International Transmission Model," NBER Working Papers 0462, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
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  10. Laidler, David, 1980. "The demand for money in the United States-- Yet again," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 219-271, January. [Downloadable!] (restricted)
  11. Klein, Benjamin, 1974. "Competitive Interest Payments on Bank Deposits and the Long-Run Demand for Money," American Economic Review, American Economic Association, vol. 64(6), pages 931-49, December. [Downloadable!] (restricted)
  12. Lewis, M K, 1978. "Interest Rates and Monetary Velocity in Australia and the United States," The Economic Record, The Economic Society of Australia, vol. 54(145), pages 111-26, April.
  13. Feige, Edgar L & Pearce, Douglas K, 1976. "Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy?," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 499-522, June. [Downloadable!] (restricted)
  14. Goldberg, Matthew & Thurston, Thom B, 1977. "Monetarism, Overshooting, and the Procyclical Movement of Velocity," Economic Inquiry, Oxford University Press, vol. 15(1), pages 26-32, January.
  15. Darby, Michael R, 1974. "The Permanent Income Theory of Consumption-A Restatement," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 228-50, May. [Downloadable!] (restricted)
  16. Barro, Robert J & Santomero, Anthony J, 1972. "Household Money Holdings and The Demand Deposit Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(2), pages 397-413, May. [Downloadable!] (restricted)
  17. Fair, Ray C, 1970. "The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors," Econometrica, Econometric Society, vol. 38(3), pages 507-16, May. [Downloadable!] (restricted)
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