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International Evidence on Long-Run Money Demand

Author

Listed:
  • Luca Benati
  • Robert E. Lucas
  • Juan Pablo Nicolini
  • Warren E. Weber

Abstract

We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.

Suggested Citation

  • Luca Benati & Robert E. Lucas & Juan Pablo Nicolini & Warren E. Weber, . "International Evidence on Long-Run Money Demand," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:587
    DOI: 10.21034/sr.587
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    References listed on IDEAS

    as
    1. Benati, Luca & Lucas, Robert E. & Nicolini, Juan Pablo & Weber, Warren, 2021. "International evidence on long-run money demand," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 43-63.
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    Cited by:

    1. Benati, Luca, 2020. "Money velocity and the natural rate of interest," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 117-134.
    2. Ernst Juerg Weber, 2019. "Copulas and Macroeconomics: the Quantity Theory of Money," Economics Discussion / Working Papers 19-12, The University of Western Australia, Department of Economics.

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    More about this item

    Keywords

    Long-run money demand; Cointegration;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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