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The Demand for Money in Mexico

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  • Keith Cuthbertson
  • Luis Galindo

Abstract

We analyse the demand for M1 and M3 and in particular the presence of a portfolio balance effect for Mexico over the period 1978–90 using quarterly data. The analysis uses economic theory and cointegration to guide the choice of appropriate independent variables. However, because of potential problems in applying the full system cointegration approach in finite samples, we rely more heavily on the general‐to‐specific and error correction methodology in a single‐equation framework. The empirical evidence indicates the existence of economically sensible demand for money equations for M1 and M3 which depend on income, an opportunity cost interest rate and a measure of the return to substitution between domestic and foreign assets. Unlike most earlier studies we find stable demand functions even when data from the ‘crisis period’ of the 1980s are included. The presence of a portfolio balance effect implies that, to interpret movements in peso monetary aggregates correctly, the authorities must take account of the impact of changes in the dollar–peso exchange rate.

Suggested Citation

  • Keith Cuthbertson & Luis Galindo, 1999. "The Demand for Money in Mexico," Manchester School, University of Manchester, vol. 67(2), pages 154-166, March.
    • Handle: RePEc:bla:manchs:v:67:y:1999:i:2:p:154-166
    DOI: 10.1111/1467-9957.00139
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    Cited by:

    1. Adnan Haider & Asad Jan & Kalim Hyder, 2013. "On the (Ir)Relevance of Monetary Aggregate Targeting in Pakistan: An Eclectic View," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 65-119, July-Dec.
    2. Policy Analyst - UNICEF Zimbabwe, 2002. "Evidence on the demand for money function in Uganda," Development and Comp Systems 0210005, University Library of Munich, Germany.
    3. Flood, Robert P. & Jeanne, Olivier, 2005. "An interest rate defense of a fixed exchange rate?," Journal of International Economics, Elsevier, vol. 66(2), pages 471-484, July.
    4. Antoni Chawluk, 2000. "Estimates of Demand for Money and Consumption Functions for the Household Sector in Poland, 1967-1999," Economics Series Working Papers 42, University of Oxford, Department of Economics.

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