Money Demand, Own Interest Rates and Deregulation
AbstractThis paper reports estimation and testing of general lag formulations of demand for M1, M3 and broad money (BM) using new data for the own rates of return on money. Own rate effects have become more important in the recently-deregulated financial environment. Own interest rates are found to be very important in explaining all three aggregates, although it is found that there is no contemporaneous interest rate effect on BM. BM appears to have the most stable econometric relationship with income and interest rates of the three aggregates, with M3 remaining unstable despite the introduction of own rates to the equation. Own rate effects may enhance the efficiency of achieving low-inflation objectives by controlling money supply growth. Excessive interest sensitivity is reduced by the presence of own rates, as is the possibility of real interest rate overkill. While the BM equation is found to have desirable properties, the econometric results are preliminary. The results certainly do not support BM as a target variable, since the lag structure is complex with respect to interest rates. Targeting BM would amount to little more than targeting nominal income directly, which requires knowledge of a wide range of influences on GDP.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp8703.
Date of creation: May 1987
Date of revision:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Felmingham, Bruce & Zhang, Qing, 2001. "The Long Run Demand For Broad Money in Australia Subject to Regime Shifts," Australian Economic Papers, Wiley Blackwell, vol. 40(2), pages 146-55, June.
- Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
- Abbas Valadkhani, 2005.
"Modelling Demand For Broad Money In Australia ,"
Australian Economic Papers,
Wiley Blackwell, vol. 44(1), pages 47-64, 03.
- Abbas Valadkhani, 2002. "Modelling Demand for Broad Money in Australia," School of Economics and Finance Discussion Papers and Working Papers Series 120, School of Economics and Finance, Queensland University of Technology.
- Kumar, Saten & Webber, Don J., 2010.
"Australasian money demand stability: Application of structural break tests,"
27569, University Library of Munich, Germany.
- Saten Kumar & Don J. Webber, 2013. "Australasian money demand stability: application of structural break tests," Applied Economics, Taylor and Francis Journals, vol. 45(8), pages 1011-1025, March.
- Don J. Webber & Saten Kumar, 2011. "Australasian money demand stability:Application of structural break tests," Working Papers 1101, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
- Stemp, Peter J, 1991. "Optimal Weights in a Check-List of Monetary Indicators," The Economic Record, The Economic Society of Australia, vol. 67(196), pages 1-13, March.
- Karfakis, Costas I & Parikh, Ashok, 1993. "A Cointegration Approach to Monetary Targeting in Australia," Australian Economic Papers, Wiley Blackwell, vol. 32(60), pages 53-72, June.
- Fassil Fanta, 2012. "Macroeconomic uncertainty, excess liquidity and stability of money demand (M3) in Australia," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 5(4), pages 325-344.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew).
If references are entirely missing, you can add them using this form.