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Financial Market Participation and the Apparent Instability of Money Demand

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  • Samuel Reynard

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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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2004_01/source/working_paper_2004_01.n.pdf
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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2004-01.

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Length: 39 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:snb:snbwpa:2004-01

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Keywords: Demand; Financial Market Participation; Cross-Sections;

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References

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  1. Brian Motley, 1988. "Should M2 be redefined?," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 33-51.
  2. N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
  3. Robert H. Rasche, 1990. "Demand functions for measures of U.S. money and debt," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 113-172.
  4. Richard D. Porter & Thomes D. Simpson & Eileen Mauskopf, 1979. "Financial Innovation and the Monetary Aggregates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 213-230.
  5. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, vol. 30(2), pages 585-603, May.
  6. Casey B. Mulligan & Xavier Sala-i-Martin, 2000. "Extensive Margins and the Demand for Money at Low Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 961-991, October.
  7. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  8. Dotsey, Michael, 1985. " The Use of Electronic Funds Transfers to Capture the Effects of Cash Management Practices on the Demand for Demand Deposits: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1493-1503, December.
  9. Robert B. Avery & Gregory E. Elliehausen & Glenn B. Canner & Thomas A. Gustafson, 1984. "Survey of consumer finances, 1983: a second report," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 857-868.
  10. Robert B. Avery & Gregory E. Elliehausen & Glenn B. Canner & Thomas A. Gustafson, 1984. "Survey of consumer finances, 1983," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages 679-692.
  11. Arthur B. Kennickell & Martha Starr-McCluer, 1994. "Changes in family finances from 1989 to 1992: evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 861-882.
  12. Uhler, R S & Cragg, John G, 1971. "The Structure of the Asset Portfolios of Households," Review of Economic Studies, Wiley Blackwell, vol. 38(115), pages 341-57, July.
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