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A stable money demand: Looking for the right monetary aggregate

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  • Pedro Teles
  • Ruilin Zhou

Abstract

A money demand relationship with M1 as the monetary aggregate holds very well until the mid-1980s but not well after that. This could be because the demand for money is not a stable relationship. The authors' conclusion is that the measure of money is not a stable measure. Technological innovation and changes in regulatory practices in the past two decades have made other monetary aggregates as liquid as M1. Once an appropriately adjusted measure of money is taken into consideration, the stability of money demand is recovered.

Suggested Citation

  • Pedro Teles & Ruilin Zhou, 2005. "A stable money demand: Looking for the right monetary aggregate," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 50-63.
  • Handle: RePEc:fip:fedhep:y:2005:i:qi:p:50-63:n:v.29no.1
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    References listed on IDEAS

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    1. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    2. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
    3. Brian Motley, 1988. "Should M2 be redefined?," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 33-51.
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    Citations

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    Cited by:

    1. Carlos Esteban Posada & Camilo Morales J., 2007. "La inflación y la política monetaria colombianas del período 1996-2006: una interpretación," BORRADORES DE ECONOMIA 004291, BANCO DE LA REPÚBLICA.
    2. Mierzejewski, Fernando, 2007. "The Money Demand with Random Output and Limited Access to Debt," MPRA Paper 6688, University Library of Munich, Germany.
    3. Tyers, Rod, 2015. "International effects of China's rise and transition: Neoclassical and Keynesian perspectives," Journal of Asian Economics, Elsevier, vol. 37(C), pages 1-19.
    4. Andre C. Silva, 2011. "Individual and Aggregate Money Demands," FEUNL Working Paper Series wp557, Universidade Nova de Lisboa, Faculdade de Economia.
    5. Mierzejewski, Fernando, 2007. "An actuarial approach to short-run monetary equilibrium," MPRA Paper 2424, University Library of Munich, Germany.
    6. Columba, Francesco, 2009. "Narrow money and transaction technology: New disaggregated evidence," Journal of Economics and Business, Elsevier, vol. 61(4), pages 312-325, July.
    7. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers.
    8. Cysne, Rubens Penha, 2011. "The n-dimensional Bailey–Divisia measure as a general-equilibrium measure of the welfare costs of inflation," Economics Letters, Elsevier, vol. 113(2), pages 99-102.
    9. Mierzejewski, Fernando, 2008. "The optimal liquidity principle with restricted borrowing," MPRA Paper 12549, University Library of Munich, Germany.
    10. Fernando Alvarez & Francesco Lippi, 2014. "Persistent Liquidity Effects and Long-Run Money Demand," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 71-107, April.
    11. Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," Economic Journal, Royal Economic Society, vol. 126(591), pages 442-464, March.
    12. Ivo J. M. Arnold & Sebastian Roelands, 2011. "Housing Wealth And U.S. Money Demand: A Panel Estimation," Contemporary Economic Policy, Western Economic Association International, vol. 29(3), pages 382-391, July.
    13. Cysne, Rubens Penha & Turchick, David, 2010. "Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1015-1030, June.
    14. Huberto M. Ennis, 2009. "Avoiding The Inflation Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 607-625, May.
    15. Inagaki, Kazuyuki, 2009. "Estimating the interest rate semi-elasticity of the demand for money in low interest rate environments," Economic Modelling, Elsevier, vol. 26(1), pages 147-154, January.
    16. David Beckworth & Kenneth P. Moon & J. Holland Toles, 2012. "Can Monetary Policy Influence Long-Term Interest Rates? It Depends," Economic Inquiry, Western Economic Association International, vol. 50(4), pages 1080-1096, October.
    17. Sophia Lazaretou, 2009. "Money supply and Greek history monetary statistics: definition, construction, sources and data," Working Papers 105, Bank of Greece.
    18. repec:usg:auswrt:2017:68:01:29-49 is not listed on IDEAS
    19. Mierzejewski, Fernando, 2006. "Liquidity preference as rational behaviour under uncertainty," MPRA Paper 2771, University Library of Munich, Germany.
    20. M. Girotti, 2016. "How Monetary Policy Changes Bank Liability Structure and Funding Cost," Working papers 590, Banque de France.
    21. repec:ibn:ijefaa:v:9:y:2017:i:10:p:46-63 is not listed on IDEAS
    22. Christian Pierdzioch & Jan-Christoph Rülke & Georg Stadtmann, 2011. "Survey Forecasts and Money Demand Functions: Some International Evidence," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 57(1), pages 5-14.

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    Keywords

    Money ; Money supply;

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