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Measuring Income Elasticity for Swiss Money Demand: What do the cantons say about financial innovation?

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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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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 05.01.

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Length: 40 pages
Date of creation: Jan 2005
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Handle: RePEc:szg:worpap:0501

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  1. Samuel Reynard, 2004. "Financial Market Participation and the Apparent Instability of Money Demand," Working Papers 2004-01, Swiss National Bank.
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  5. Casey B. Mulligan, 1997. "The demand for money by firms: some additional empirical results," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 125, Federal Reserve Bank of Minneapolis.
  6. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 247-274, March.
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  8. 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, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(2), pages 25-41, April.
  9. 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, University of Chicago Press, vol. 105(5), pages 1061-79, October.
  10. Olympia Bover & Nadine Watson, 2000. "Are there Economies of Scale in the Demand for Money by Firms? some Panel Data Estimates," Banco de Espa�a Working Papers, Banco de Espa�a 0008, Banco de Espa�a.
  11. 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), Swiss Society of Economics and Statistics (SSES), vol. 126(IV), pages 505-520, December.
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  13. 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, Springer, vol. 137(2), pages 244-272, June.
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Citations

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

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