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The Demand for Money: A Dynamic Rational Expectations Model

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  • Cuthbertson, Keith
  • Taylor, Mark P

Abstract

This paper presents and estimates a model of the demand for money which explicitly incorporates foward-looking behavior. A multiperiod, rational expectations, quadratic costs of adjustment problem is solved using the discrete time calculus of variations to yield a money demand equation which is both foward-looking and contains a lagged dependent variable, and nests partial adjustment and error correction alternatives. The equation is estimated jointlywith a vector autoregression for the forcing variables, subject to cross-equation restrictions in an attempt to circumvent the R. E. Lucas_(1976) critique, on U. K. data for narrow money, MI. The results are encouraging. Copyright 1987 by Royal Economic Society.

Suggested Citation

  • Cuthbertson, Keith & Taylor, Mark P, 1987. "The Demand for Money: A Dynamic Rational Expectations Model," Economic Journal, Royal Economic Society, vol. 97(388a), pages 65-76, Supplemen.
  • Handle: RePEc:ecj:econjl:v:97:y:1987:i:388a:p:65-76
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    Cited by:

    1. David Fielding & Anja Shortland, 2005. "How does political violence affect confidence in a local currency? Evidence from Egypt," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(7), pages 841-866.
    2. K Alec Chrystal & Paul Mizen, 2001. "Consumption, money and lending: a joint model for the UK household sector," Bank of England working papers 134, Bank of England.
    3. Robert A. Amano & Tony S. Wirjanto, "undated". "The Dynamic Behaviour of Canadian Imports and the Linear-Quadratic Model: Evidence Based on the Euler Equation," Staff Working Papers 94-6, Bank of Canada.
    4. Alejandro Francisco Peláez Ruiz-Fornells, 2009. "The symetry underlymg real interest rate behaviour and the limk to investment flows: an ex ante formal treatment," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 09-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
    5. Martin Schmidt, 2007. "The long and short of money: short-run dynamics within a structural model," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 175-192.
    6. Calza, Alessandro & Zaghini, Andrea, 2006. "Non-linear dynamics in the euro area demand for M1," Working Paper Series 592, European Central Bank.
    7. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
    8. John Ashworth & David Barlow & Lynne Evans, 2014. "Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK," Manchester School, University of Manchester, vol. 82(6), pages 732-750, December.
    9. Ordonez, Javier, 2003. "Stability and non-linear dynamics in the broad demand for money in Spain," Economics Letters, Elsevier, vol. 78(1), pages 139-146, January.
    10. Daiki Maki & Shin-ichi Kitasaka, 2015. "Residual-based tests for cointegration with three-regime TAR adjustment," Empirical Economics, Springer, vol. 48(3), pages 1013-1054, May.
    11. Chen, Show-Lin & Tsai, Li-Ju & Wu, Jyh-Lin, 2004. "A revisit to liquidity effects--evidence from a non-linear approach," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 501-517, September.
    12. Lauri Kajanoja, 2004. "Money as an indicator variable for monetary policy when money demand is forward looking," Macroeconomics 0405003, EconWPA.
    13. Engsted, Tom & Haldrup, Niels, 1997. "Money demand, adjustment costs, and forward-looking behavior," Journal of Policy Modeling, Elsevier, vol. 19(2), pages 153-173, April.
    14. Thórarinn G. Pétursson, 2000. "The representative household’s demand for money in a cointegrated VAR model," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 162-176.
    15. Fanelli, Luca, 2002. "A new approach for estimating and testing the linear quadratic adjustment cost model under rational expectations and I(1) variables," Journal of Economic Dynamics and Control, Elsevier, vol. 26(1), pages 117-139, January.

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