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International Evidence on the Demand for Money

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Ray C. Fair

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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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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: Jun 1989
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Handle: RePEc:nbr:nberwo:2106

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References listed on IDEAS
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. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. R. W. Hafer, 1985. "Monetary stabilization policy: evidence from money demand forecasts," Review, Federal Reserve Bank of St. Louis, issue May, pages 21-26. [Downloadable!]
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1973-3), pages 577-646. [Downloadable!]
  8. Daniel L. Thornton, 1985. "Money demand dynamics: some new evidence," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 14-23. [Downloadable!]
  9. 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. [Downloadable!]
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  10. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1976-3), pages 683-740. [Downloadable!]
  11. 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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(explanations, 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. Yu HSING, 1989. "On The Variable Money Demand Elasticity: The Case Of Taiwan," International Economic Journal, Korean International Economic Association, vol. 3(3), pages 43-52, October. [Downloadable!] (restricted)
  2. Ray C. Fair & Kathryn M. Dominguez, 1992. "Effects of the Changing U.S. Age Distribution on Macroeconomic Equations," NBER Working Papers 2280, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Gérard Duchêne & Ramona Jimborean & Boris Najman, 2006. "Structure of Monetary Assets in Transition Economies: Financial Innovation and Structural Transformation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00270544_v1, HAL. [Downloadable!]
  5. Bernd Hayo, 1999. "The Demand For Money In Austria," Macroeconomics 9902012, EconWPA. [Downloadable!]
    Other versions:
  6. Joseph E. Gagnon, 1989. "A forward-looking multicountry model: MX3," International Finance Discussion Papers 359, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Bartolini, Leonardo & Giorgianni, Lorenzo, 2001. "Excess Volatility of Exchange Rates with Unobservable Fundamentals," Review of International Economics, Blackwell Publishing, vol. 9(3), pages 518-30, August. [Downloadable!] (restricted)
    Other versions:
  8. Mohsen Bahmani-Oskooee & Hyun-Jae Rhee, 1994. "Long-Run Elasticities Of The Demand For Money In Korea: Evidence From Cointegration Analysis," International Economic Journal, Korean International Economic Association, vol. 8(2), pages 83-93, June. [Downloadable!] (restricted)
  9. James Boughton, 1992. "International comparisons of money demand," Open Economies Review, Springer, vol. 3(3), pages 323-343, October. [Downloadable!] (restricted)
  10. Yu Hsing, 2006. "Tests Of Functional Forms, Currency Substitution, And Capital Mobility Of Czech Money Demand Function," Prague Economic Papers, University of Economics, Prague, vol. 2006(4), pages 291-299. [Downloadable!] (restricted)
  11. Shekar Bose & Hafizur Rahman, 1996. "The Demand For Money In Canada: A Cointegration Analysis," International Economic Journal, Korean International Economic Association, vol. 10(4), pages 29-45, December. [Downloadable!] (restricted)
  12. Roberto Golinelli & Sergio Pastorello, 2002. "Modelling the demand for M3 in the Euro area," European Journal of Finance, Taylor and Francis Journals, vol. 8(4), pages 371-401, December. [Downloadable!] (restricted)
  13. Raimundo Soto & Matías Tapia, 2001. "Seasonal cointegration and the stability of the demand for money," Working Papers Central Bank of Chile 103, Central Bank of Chile. [Downloadable!]
  14. Augustine C. Arize, 1990. "Effects Of Financial Innovations On The Money Demand Function: Evidence From Japan," International Economic Journal, Korean International Economic Association, vol. 4(1), pages 59-70, April. [Downloadable!] (restricted)
  15. David Gruen & Marianne Gizycki, 1993. "Explaining Forward Discount Bias: Is it Anchoring?," RBA Research Discussion Papers rdp9307, Reserve Bank of Australia. [Downloadable!]
  16. Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are exchange rates excessively volatile? And what does "excessively volatile" mean, anyway?," Research Paper 9601, Federal Reserve Bank of New York. [Downloadable!]
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  17. Bernd Hayo, 1998. "Estimating a European Demand for Money," Macroeconomics 9811008, EconWPA. [Downloadable!]
    Other versions:
  18. Ivo Arnold, 1994. "The myth of a stable European money demand," Open Economies Review, Springer, vol. 5(3), pages 249-259, July. [Downloadable!] (restricted)
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