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A Closer Look at Long Run Money Demand

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Author Info
Alfred A. Haug (York University, Canada)
Julie Tam (Stanford University, USA)
Abstract

We study annual United States data from 1869 or 1900 to 1999. We find evidence for a well-specified and stable model of money demand with data from 1946 to 1999. We carry out diagnostic and stability tests, including nonlinearity tests. A linear cointegration model with the monetary base performs better than a model with M1. A specification with M2 is not supported. We use real GNP as the scale variable and a short term interest rate as the opportunity cost measure. We estimate an income elasticity of .86 and an interest rate elasticity of -.44 for the monetary base.

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File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/Haug_Tam.pdf
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File Function: Revised version, 2002
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Paper provided by York University, Department of Economics in its series Working Papers with number 2002_09.

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Length: 21 pages
Date of creation: Nov 2001
Date of revision: Sep 2002
Handle: RePEc:yca:wpaper:2002_09

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E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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    Other versions:
  2. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct. [Downloadable!]
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  12. Lutkepohl, Helmut & Terasvirta, Timo & Wolters, Jurgen, 1999. "Investigating Stability and Linearity of a German M1 Money Demand Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 511-25, Sept.-Oct. [Downloadable!]
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  13. Hoffman, Dennis L & Rasche, Robert H, 1991. "Long-Run Income and Interest Elasticities of Money Demand in the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 665-74, November. [Downloadable!] (restricted)
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  14. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October. [Downloadable!] (restricted)
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  15. Chao, John C. & Phillips, Peter C. B., 1999. "Model selection in partially nonstationary vector autoregressive processes with reduced rank structure," Journal of Econometrics, Elsevier, vol. 91(2), pages 227-271, August. [Downloadable!] (restricted)
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  19. Miller, Stephen M, 1991. "Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 139-54, May. [Downloadable!] (restricted)
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