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Is the US Demand for Money Unstable?

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  • Rao, B. Bhaskara
  • Kumar, Saten

Abstract

The demand for money (M1) for the USA is estimated with annual data from 1960-2008 and its stability is analyzed with the extended Gregory and Hansen (1996b) test. In addition to estimating the canonical specification, alternative specifications are estimated which include a trend and additional variables to proxy the cost of holding money. Results with our extended specification showed that there has been a structural change in 1998 and the constraint that income elasticity is unity could not be rejected by subsample estimates. Short run dynamic adjustment equations are estimated with the lagged residuals from the fully modified OLS (FMOLS) estimates of cointegrating equation and also with the general to specific approach (GETS).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15715.

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Date of creation: 14 Jun 2009
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Handle: RePEc:pra:mprapa:15715

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Keywords: Demand for M1; USA; Structural Breaks; Income Elasticity; Cost of Holding Money;

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  1. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 335, University of Rochester - Center for Economic Research (RCER).
  2. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1217-1264.
  3. 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.
  4. 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.
  5. Peter N. Ireland, 2001. "Money's Role in the Monetary Business Cycle," NBER Working Papers 8115, National Bureau of Economic Research, Inc.
  6. B. Bhaskara Rao & Rup Singh, 2006. "Demand for money for Fiji with PcGets," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(15), pages 987-991.
  7. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  8. William Poole, 1987. "Monetary Policy Lessons of recent Inflation and Disinflation," NBER Working Papers 2300, National Bureau of Economic Research, Inc.
  9. McNown, Robert & Wallace, Myles S., 1992. "Cointegration tests of a long-run relation between money demand and the effective exchange rate," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(1), pages 107-114, February.
  10. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(1), pages 31-44, February.
  11. Plamen Yossifov, 2003. "Estimation of a Money Demand Function for M2 in the U.S.A. in a Vector Error Correction Model," Macroeconomics, EconWPA 0302007, EconWPA.
  12. 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.
  13. 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.
  14. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 472-92, June.
  15. Subramanian S. Sriram, 1999. "Survey of Literatureon Demand for Money," IMF Working Papers, International Monetary Fund 99/64, International Monetary Fund.
  16. Kyongwook Choi & Chulho Jung, 2009. "Structural changes and the US money demand function," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 41(10), pages 1251-1257.
  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.
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Cited by:
  1. Mulligan, Robert F. & Koppl, Roger, 2011. "Monetary policy regimes in macroeconomic data: An application of fractal analysis," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 51(2), pages 201-211, May.
  2. Stephen M. Miller & Luis F. Martins & Rangan Gupta, 2014. "A Time-Varying Approach of the US Welfare Cost of Inflation," Working Papers, University of Pretoria, Department of Economics 201419, University of Pretoria, Department of Economics.
  3. Kumar, Saten & Chowdhury, Mamta & Rao, B. Bhaskara, 2010. "Demand for Money in the Selected OECD Countries: A Time Series Panel Data Approach and Structural Breaks," MPRA Paper 22204, University Library of Munich, Germany.
  4. Kumar, Saten & Pacheco, Gail, 2012. "What determines the long run growth rate in Kenya?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(5), pages 705-718.

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