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Short-Run Money Demand

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  • Laurence Ball

Abstract

The paper estimates a long-run demand function for M1, using U.S. data for 1959-1993. This paper interprets deviations from this long-run relation with Goldfeld's partial adjustment model. A key innovation is the choice of the interest rate in the money demand function. Most previous work uses a short-term market rate, but this paper uses the average return on near monies' close substitutes for M1 such as savings accounts and money market mutual funds. This approach yields a predicted path of M1 velocity that closely matches the data. The volatility of velocity after 1980 is explained by volatility in the returns on near monies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9235.

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Date of creation: Sep 2002
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Publication status: published as Ball, Laurence, 2012. "Short-run money demand," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 622-633.
Handle: RePEc:nbr:nberwo:9235

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  1. Poole, William, 1988. "Monetary Policy Lessons of Recent Inflation and Disinflation," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(3), pages 73-100, Summer.
  2. Duca, John V, 2000. "Financial Technology Shocks and the Case of the Missing M2," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(4), pages 820-39, November.
  3. Friedman, Benjamin M, 1988. "Lessons on Monetary Policy from the 1980s," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(3), pages 51-72, Summer.
  4. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies, Board of Governors of the Federal Reserve System (U.S.) 57, Board of Governors of the Federal Reserve System (U.S.).
  5. Baba, Yoshihisa & Hendry, David F & Starr, Ross M, 1992. "The Demand for M1 in the U.S.A., 1960-1988," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 25-61, January.
  6. Dutkowsky, Donald H & Cynamon, Barry Z, 2003. " Sweep Programs: The Fall of M1 and Rebirth of the Medium of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(2), pages 263-79, April.
  7. 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.
  8. Judd, John P & Scadding, John L, 1982. "The Search for a Stable Money Demand Function: A Survey of the Post-1973 Literature," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 20(3), pages 993-1023, September.
  9. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 91-3, Federal Reserve Bank of Chicago.
  10. Laurence Ball, 1998. "Another Look at Long-Run Money Demand," NBER Working Papers 6597, National Bureau of Economic Research, Inc.
  11. 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.
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  15. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
  16. John B. Carlson & Susan M. Byrne, 1992. "Recent behavior of velocity: alternative measures of money," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q I, pages 2-10.
  17. Hoffman, Dennis L. & Rasche, Robert H. & Tieslau, Margie A., 1995. "The stability of long-run money demand in five industrial countries," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(2), pages 317-339, April.
  18. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 169-172, January.
  19. Brian Motley, 1988. "Should M2 be redefined?," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Win, pages 33-51.
  20. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 137-167, January.
  21. Robert L. Hetzel, 1989. "M2 and monetary policy," Economic Review, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sep, pages 14-29.
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Cited by:
  1. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 2003. "Backward-Looking Interest Rate Rules, Interest Rate Smoothing and Macroeconomic Instability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3928, C.E.P.R. Discussion Papers.
  2. Kirill Sosunov, 2012. "Estimation of the Money Demand Function in Russia," HSE Working papers, National Research University Higher School of Economics WP BRP 20/EC/2012, National Research University Higher School of Economics.
  3. Marcus Scheiblecker, 2012. "Between Cointegration and Multicointegration. Modelling Time Series Dynamics by Cumulative Error Correction Models," WIFO Working Papers, WIFO 431, WIFO.
  4. Sosunov, K., 2013. "Estimation of the Money Demand Function in Russia," Journal of the New Economic Association, New Economic Association, New Economic Association, vol. 18(2), pages 89-99.
  5. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, Elsevier, vol. 56(4), pages 247-272.
  6. Marcus Scheiblecker, 2012. "Modelling Short-run Money Demand for the USA," WIFO Working Papers, WIFO 442, WIFO.

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