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The Demand For Money in the U.S. During the Great Depression: Estimates and Comparison with the Post War Experience

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Dennis Hoffman
Robert H. Rasche

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Abstract

This study investigates the equilibrium demand for narrowly defined monetary aggregate during the Great Depression. We find evidence in support of a stable demand for real balance, but rio evidence in support of stable demand functions for real currency and real monetary base. This is consistent with the Friedman-Schwartz interpretation of this period. We not reject the hypothesis that the equilibrium demand for real Ml is stable between the pre and post WWII sample periods. We find that the "shift in the drift" of Ml velocity after 1945 and at the end of 1981 as well as the "shift in the drift" of currency and base velocities in 1981 is the image of corresponding "shift in the drift" of short-term interest rates. We interpret this as consistent with the hypothesis that the dramatic change in velocity patterns after WWII and in 1981 result from changes in inflationary expectations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3217.

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Date of creation: Dec 1989
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Handle: RePEc:nbr:nberwo:3217

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  1. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
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  2. Stephen K. McNees, 1988. "How accurate are macroeconomic forecasts?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 15-36.
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  4. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  6. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
  7. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July. [Downloadable!] (restricted)
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
  9. H. Robert Heller, 1988. "Implementing monetary policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 419-429.
  10. Hoffman, Dennis L & Rasche, Robert H, 1991. "Long-Run Income and Interest Elasticities of Money Demand in the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 665-74, November. [Downloadable!] (restricted)
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  11. Gould, John P & Nelson, Charles R, 1974. "The Stochastic Structure of the Velocity of Money," American Economic Review, American Economic Association, vol. 64(3), pages 405-18, June. [Downloadable!] (restricted)
  12. Rasche, 1988. "Demand Functions For U.S. Money And Credit Measures," Papers 8718, Michigan State - Econometrics and Economic Theory.
  13. Michael T. Belongia, 1988. "Are economic forecasts by government agencies biased? Accurate?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 15-23. [Downloadable!]
  14. Rasche, Robert H., 1987. "M1 -- Velocity and money-demand functions: Do stable relationships exist?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 9-88, January. [Downloadable!] (restricted)
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