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Tests of the functional form, the substitution effect, and the wealth effect of Mexico´s money demand function

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  • Yu Hsing

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Abstract

M1, M2, and M3 demands in Mexico are positively influenced by output and stock prices and negatively associated with the saving rate, the U.S. interest rate, and the expected inflation rate. Peso depreciation affects M1 demand negatively and M2 and M3 demands positively. The log-linear form cannot be rejected for M1 demand and can be rejected for M2 and M3 demands, while the linear form can be rejected for M1, M2, and M3 demands. The CUSUMSQ test shows that M1, M2, and M3 demands are stable; while the CUSUM test indicates stability in M1 and M3 demands and instability in M2 demand.

Suggested Citation

  • Yu Hsing, 2007. "Tests of the functional form, the substitution effect, and the wealth effect of Mexico´s money demand function," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, May.
  • Handle: RePEc:col:000151:004255
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    File URL: http://revistas.urosario.edu.co/index.php/economia/article/view/1114/1008
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    References listed on IDEAS

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    1. McKinnon, Ronald I, 1982. "Currency Substitution and Instability in the World Dollar Standard," American Economic Review, American Economic Association, vol. 72(3), pages 320-333, June.
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    3. Prock, Jerry & Soydemir, Gokce A. & Abugri, Benjamin A., 2003. "Currency substitution: Evidence from Latin America," Journal of Policy Modeling, Elsevier, vol. 25(4), pages 415-430, June.
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    5. David H. Small & Richard D. Porter, 1989. "Understanding the behavior of M2 and V2," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 244-254.
    6. Marquez, Jaime, 1987. "Money demand in open economies: A currency substitution model for Venezuela," Journal of International Money and Finance, Elsevier, vol. 6(2), pages 167-178, June.
    7. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
    8. Mehra, Yash P, 1993. "The Stability of the M2 Demand Function: Evidence from an Error-Correction Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 455-460, August.
    9. Yash P. Mehra, 1997. "A review of the recent behavior of M2 demand," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-44.
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    More about this item

    Keywords

    Box-Cox transformation; currency substitution; wealth effect; stability tests;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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