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Money Demand Predictability

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  • V. Vance Roley
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    Abstract

    The performance of empirical money demand equations over the past decade raises serious questions about money demand predictability. A variety of specifications were presented to explain past episodes of apparent money demand instability, but their success in predicting future money demand is limited in most instances. In particular, the unprecedented decline in the velocity of Ml during 1982 and 1983 was not captured fullyby any of the previously-modified conventional specifications. This paper evaluates a variety of the approaches and specifications proposed inprevious money demand studies to explain the behavior of the narrowly defined money stock from the mid 1970's through 1983. The empirical results cast doubt on the appropriateness of the conventional money demand specification in both the pre- and post- 1974 periods.

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    File URL: http://www.nber.org/papers/w1580.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1580.

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    Date of creation: Mar 1985
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    Publication status: published as Roley, V. Vance. Journal of Money, Credit, and Banking, Vol. XVII, No. 4, Part 2, (November 1985), pp. 611-641.
    Handle: RePEc:nbr:nberwo:1580

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    1. Marvin Goodfriend, 1983. "Measurement error and a reinterpretation of the conventional money demand regression," Working Paper 83-03, Federal Reserve Bank of Richmond.
    2. Edgar L. Feige, 2005. "Expectations And Adjustments In The Monetary Sector," Macroeconomics 0502005, EconWPA.
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    5. Carr, Jack & Darby, Michael R., 1981. "The role of money supply shocks in the short-run demand for money," Journal of Monetary Economics, Elsevier, vol. 8(2), pages 183-199.
    6. 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.
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    8. Feige, Edgar L & Pearce, Douglas K, 1977. "The Substitutability of Money and Near-Monies: A Survey of the Time-Series Evidence," Journal of Economic Literature, American Economic Association, vol. 15(2), pages 439-69, June.
    9. Hamburger, Michael J., 1977. "Behavior of the money stock : Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 265-288, July.
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    14. Roley, V Vance & Walsh, Carl E, 1985. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 1011-39, Supp..
    15. Robert J. Gordon, 1984. "The 1981-82 Velocity Decline: A Structural Shift in Income or Money Demand?," NBER Working Papers 1343, National Bureau of Economic Research, Inc.
    16. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219.
    17. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    18. Carl E. Walsh, 1982. "The effects of alternative operating procedures on economic and financial relationships," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 133-180.
    19. Hamburger, Michael J., 1983. "Recent velocity behavior, the demand for money and monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Dec, pages 108-128.
    20. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-44, December.
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    22. 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.
    23. Anderson, Richard G & Rasche, Robert H, 1982. "What Do Money Market Models Tell Us about How to Implement Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 796-828, November.
    24. Robert L. Hetzel, 1982. "The October 1979 regime of monetary control and the behavior of the money supply in 1980," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 3-15.
    25. Tinsley, P. A. & Garrett, Bonnie & Friar, Monica, 1981. "An expose of disguised deposits," Journal of Econometrics, Elsevier, vol. 15(1), pages 117-137, January.
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    29. Plosser, Charles I & Schwert, G William & White, Halbert, 1982. "Differencing as a Test of Specification," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 535-52, October.
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    Cited by:
    1. Werner, Richard A., 2012. "Towards a new research programme on ‘banking and the economy’ — Implications of the Quantity Theory of Credit for the prevention and resolution of banking and debt crises," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 1-17.
    2. Robert H. Rasche, 1985. "Interest rate volatility and alternative monetary control procedure," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 46-63.

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