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Has M2 demand become unstable?

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  • Yash P. Mehra

Abstract

Standard M2 demand regressions generate prediction errors in 1990, 1991, and 1992 that cumulate to an overprediction of M2 of about 4.2 to 4.3 percent by the second quarter of 1992. These prediction errors are not large and can be accounted for by M2 demand regressions that include a yield curve variable. The yield curve variable captures portfolio substitutions out of M2 into other long-term financial assets such as bond and equity funds.

Suggested Citation

  • Yash P. Mehra, 1992. "Has M2 demand become unstable?," Economic Review, Federal Reserve Bank of Richmond, vol. 78(Sep), pages 26-35.
    • Handle: RePEc:fip:fedrer:y:1992:i:sep:p:26-35:n:v.78no.5
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    References listed on IDEAS

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    1. John V. Duca, 1992. "The case of the missing M2," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 1-24.
    2. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-429, November.
    3. Dufour, Jean-Marie, 1980. "Dummy variables and predictive tests for structural change," Economics Letters, Elsevier, vol. 6(3), pages 241-247.
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    Cited by:

    1. Duca, John V., 1995. "Should bond funds be added to M2?," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 131-152, April.
    2. Yash P. Mehra, 1997. "A review of the recent behavior of M2 demand," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-44.

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