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International Evidence on the Demand for Money

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  • Ray C. Fair

Abstract

One of the current questions in the literature on the demand for money is whether the adjustment of actual to desired money holdings is in nominal or real terms. This paper describes a simple procedure than can be used to test the nominal against the real hypothesis. The test is carried out for 27 countries. The paper also tests the structural stability of the demand for money equations and the correctness of the dynamic specification. The results are strongly in favor of the nominal adjustment hypothesis. The estimated equations are quite good in terms of the number of coefficient estimates that are of the right sign and that are significant. The equations also stand up well when tested against a more general dynamic specification. There is, however, some evidence of structural instability before and after 1973, although the instability is generally moderate. The instability does not affect the conclusion that the nominal adjustment hypothesis dominates the real adjustment hypothesis.

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File URL: http://www.nber.org/papers/w2106.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2106.

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Date of creation: Dec 1986
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Publication status: published as The Review of Economics and Statistics, Vol. LXIX, No. 3, pp. 473-480, (August 1987).
Handle: RePEc:nbr:nberwo:2106

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  1. 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.
  2. R. W. Hafer, 1985. "Monetary stabilization policy: evidence from money demand forecasts," Review, Federal Reserve Bank of St. Louis, issue May, pages 21-26.
  3. Daniel L. Thornton, 1985. "Money demand dynamics: some new evidence," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 14-23.
  4. Hwang, Hae-shin, 1985. "Test of the Adjustment Process and Linear Homogeneity in a Stock Adjustment Model of Money Demand," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 689-92, November.
  5. Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100 Elsevier.
  6. R. W. Hafer & Scott E. Hein, 1980. "The dynamics and estimation of short-run money demand," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 26-35.
  7. Andrews, Donald W. K. & Fair, Ray C., 1987. "Inference in Econometric Models with Structural Change," Working Papers 636, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Milbourne, Ross, 1983. "Price Expectations and the Demand for Money: Resolution of a Paradox," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 633-38, November.
  9. 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.
  10. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
  11. Spencer, David E, 1985. "Money Demand and the Price Level," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 490-96, August.
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