The demand for money: the evidence from the different types of money

This paper investigates the stability of the demand for money in the United States and provides a comparison among the simple-sum monetary aggregates, the original (non-credit-card-augmented) Divisia monetary aggregates, and the credit-augmented Divisia and credit-augmented Divisia inside aggregates. We use quarterly data from the Center for Financial Stability and the Pesaran et al. (2001) bounds test procedure to investigate the long-run relation between the monetary aggregates and their respective user costs. In doing so, we use three classic money demand functions—the log–log, the semi-log, and the Selden and Latané specifications. With quarterly data over the 1967:q1 through 2025:q1 period, for which the original Divisia monetary aggregates are available, we find evidence of a stable money demand function only with the Sum M4 aggregate under all money demand specifications, but not with any of the Divisia aggregates. With quarterly data over the post-2006 period, for which the credit-augmented Divisia monetary aggregates are also available, our findings show that the demand for money is stable across all money demand specifications with all of the original Divisia aggregates and the credit-augmented Divisia aggregates (but not with all of the credit-augmented Divisia inside aggregates). We also find evidence of cointegration with the Sum M3 and Sum M4 aggregates under all three money demand specifications, but not with the Fed’s Sum M2 aggregate.