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Financial Market Participation and the Apparent Instability of Money Demand

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Author Info
Reynard, Samuel () (Swiss National Bank)

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Abstract

This paper uses multi-period cross-sectional data on financial assets holdings to shed light on the postwar stability of money demand in the United States. I first present a new measure of the evolution of financial market participation, by relating participation to the extensive margins of money demand, and quantify the influence of wealth on participation decisions. I then relate the increase in participation to the period of missing money and to the subsequent higher interest rate elasticity of monetary aggregates. The paper indicates that time series estimations of money demand relationships are inherently flawed and tend to inappropriately suggest instability.

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Publisher Info
Paper provided by Swiss National Bank in its series Working Papers with number 2004-1.

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Length: 39 pages
Date of creation: 01 Jan 2004
Date of revision:
Handle: RePEc:ris:snbwpa:2004_001

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Related research
Keywords: Money Demand; Financial Market Participation; Cross-Sections;

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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

Cited by:
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  1. Pascal St-Amour, 2005. "Direct Preference for Wealth in Aggregate Household Portfolio," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.04, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
  2. Samuel Reynard, 2007. "Maintaining low inflation: money, interest rates, and policy stance," Working Paper Series 756, European Central Bank. [Downloadable!]
    Other versions:
  3. Fischer, Andreas M, 2005. "Measuring Income Elasticity for Swiss Money Demand: What Do the Cantons Say About Financial Innovation?," CEPR Discussion Papers 5050, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Ricardo M. Sousa, 2007. "Wealth Shocks and Risk Aversion," NIPE Working Papers 28/2007, NIPE - Universidade do Minho. [Downloadable!]
  5. Markus Haas & Stefan Mittnik & Mark S. Paolella, 2008. "Asymmetric Multivariate Normal Mixture GARCH," CFS Working Paper Series 2008/07, Center for Financial Studies. [Downloadable!]
  6. Guenter W. Beck & Volker Wieland, 2008. "Central Bank misperceptions and the role of money in interest rate rules," Working Paper Series 967, European Central Bank. [Downloadable!]
    Other versions:
  7. Anders Warne, 2006. "Bayesian inference in cointegrated VAR models - with applications to the demand for euro area M3," Working Paper Series 692, European Central Bank. [Downloadable!]
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