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Money Demand, Own Interest Rates and Deregulation

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  • Adrian Blundell-Wignall

    (Reserve Bank of Australia)

  • Susan Thorp

    (Reserve Bank of Australia)

Abstract

This 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.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp8703.

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Date of creation: May 1987
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Handle: RePEc:rba:rbardp:rdp8703

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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. Gordon de Brouwer & Irene Ng & Robert Subbaraman, 1993. "The Demand for Money in Australia: New Tests on an Old Topic," RBA Research Discussion Papers rdp9314, Reserve Bank of Australia.
  5. Abbas Valadkhani, 2005. "Modelling Demand For Broad Money In Australia ," Australian Economic Papers, Wiley Blackwell, vol. 44(1), pages 47-64, 03.
  6. David Gruen & Glenn Stevens, 2000. "Australian Macroeconomic Performances and Policies in the 1990s," RBA Annual Conference Volume, in: David Gruen & Sona Shrestha (ed.), The Australian Economy in the 1990s Reserve Bank of Australia.
  7. 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.
  8. 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.
  9. Felmingham, B. & Zhang, Q., 2000. "The Long Run Demand for Broad Money in Australia Subject to Regime Shifts," Papers 2000-07, Tasmania - Department of Economics.
  10. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.

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