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Measuring Income Elasticity for Swiss Money Demand: What do the Cantons say about Financial Innovation?

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  • Andreas M. Fischer

Abstract

Recent time-series evidence has re-confirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2006-01.

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Length: 44 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:snb:snbwpa:2006-01

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Keywords: Money Demand; Cross-Regional Estimates; Regional Financial Sophistication;

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References

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  1. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  2. Andreas M. Fischer & Michel Peytrignet, 1990. "Are Larger Monetary Aggregates Interesting? Some Exploratory Evidence for Switzerland Using Feedback Models," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 126(IV), pages 505-520, December.
  3. Hiroshi Fujiki & Casey B. Mulligan, 1996. "A Structural Analysis of Money Demand: Cross-Sectional Evidence from Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 14(2), pages 53-78, December.
  4. Reynard, Samuel, 2004. "Financial market participation and the apparent instability of money demand," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1297-1317, September.
  5. Bover, Olympia & Watson, Nadine, 2001. "Are there Economies of Scale in the Demand for Money by Firms? Some Panel Data Estimates," CEPR Discussion Papers 2818, C.E.P.R. Discussion Papers.
  6. Fujiki, Hiroshi & Hsiao, Cheng & Shen, Yan, 2002. "Is There a Stable Money Demand Function under the Low Interest Rate Policy? A Panel Data Analysis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(2), pages 1-23, April.
  7. Ernst Baltensperger & Thomas Jordan & Marcel Savioz, 2001. "The demand for M3 and inflation forecasts: An empirical analysis for Switzerland," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(2), pages 244-272, June.
  8. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1061-79, October.
  9. Fujiki, Hiroshi, 2002. "Money Demand near Zero Interest Rate: Evidence from Regional Data," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(2), pages 25-41, April.
  10. Casey B. Mulligan & Xavier Sala-I-Martin, 1992. "U.S. Money Demand: Surprising Cross-Sectional Estimates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 285-343.
  11. Fischer, Andreas M & Peytrignet, Michel, 1991. "The Lucas Critique in Light of Swiss Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(4), pages 481-93, November.
  12. Casey B. Mulligan, 1997. "The demand for money by firms: some additional empirical results," Discussion Paper / Institute for Empirical Macroeconomics 125, Federal Reserve Bank of Minneapolis.
  13. Michel Peytrignet & Christof Stahel, 1998. "Stability of money demand in Switzerland: A comparison of the M2 and M3 cases," Empirical Economics, Springer, vol. 23(3), pages 437-454.
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Citations

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Cited by:
  1. Andreas M. Fischer, 2010. "Immigration and large banknotes," Working Papers 2010-17, Swiss National Bank.
  2. Wei Liao & Sampawende J.-A. Tapsoba, 2014. "China’s Monetary Policy and Interest Rate Liberalization: Lessons from International Experiences," IMF Working Papers 14/75, International Monetary Fund.
  3. Lee, Chien Chiang & Chang, Chun Ping, 2012. "The Demand for Money in China: A Reassessment Using the Bounds Testing Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 74-94, March.
  4. Ivo J. M. Arnold & Sebastian Roelands, 2011. "Housing Wealth And U.S. Money Demand: A Panel Estimation," Contemporary Economic Policy, Western Economic Association International, vol. 29(3), pages 382-391, 07.
  5. Nagayasu, Jun, 2011. "Financial Innovation and Regional Money," MPRA Paper 29194, University Library of Munich, Germany.
  6. Nagayasu, Jun, 2009. "Regional Inflation in China," MPRA Paper 24722, University Library of Munich, Germany.
  7. David Norman, 2006. "Modelling Manufactured Exports: Evidence from Australian States," RBA Research Discussion Papers rdp2006-01, Reserve Bank of Australia.
  8. Stephen G. Hall & George Hondroyiannis & P.A.V.B. Swamy & George S. Tavlas, 2009. "Where Has All the Money Gone? Wealth and the Demand for Money in South Africa †," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(1), pages 84-112, January.
  9. Arnold, Ivo J.M. & Roelands, Sebastian, 2010. "The demand for euros," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 674-684, June.
  10. Nuno Carlos LEITÃO & Muhammad SHAHBAZ, 2012. "Migration and Tourism Demand," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(567)), pages 39-48, February.
  11. Nuno, Carlos Leitão & Muhammad, Shahbaz, 2011. "Migration and Tourist Flows," MPRA Paper 34905, University Library of Munich, Germany, revised 12 Nov 2011.

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