The Relationship of Opportunity Cost to the Interest Elasticity of Money Demand
This paper examines the impact of changing opportunity costs on the money demand relation proposed by Friedman and Schwartz (1982). The Friedman-Schwartz relation is estimated across regimes that alternately have permitted and prohibited interest payments on demand accounts. Extending the Friedman-Schwartz analysis to include the monetary base and M1, the effects of differing opportunity costs on money demand are examined through time. It is the introduction of interest bearing accounts into Ml that has changed the opportunity cost of holding (demanding) Ml relative to the alternatives, causing the apparent instability in the velocity of Ml.
Volume (Year): 19 (1993)
Issue (Month): 3 (Summer)
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- Goodhart, Charles A E, 1982. "Monetary Trends in the United States and the United Kingdom: A British Review," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1540-1551, December.
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- Carlson, John A & Frew, James R, 1980. "Money Demand Responsiveness to the Rate of Return on Money: A Methodological Critique," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 598-607, June.
- Ahmet Baytas & Alvin L. Marty, 1989. "The Interest Elasticity of Money Demand: Further Evidence," Eastern Economic Journal, Eastern Economic Association, vol. 15(2), pages 107-111, Apr-Jun.
- Yash P. Mehra, 1986. "Recent financial deregulation and the interest elasticity of M1 demand," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 13-24.
- Friedman, Milton, 1988. "Money and the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 221-245, April.
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