Financial innovations and the interest elasticity of money demand: Evidence from an error correction model
The difficulty of estimating a stable money demand function has been blamed on financial innovations of the past two decades. Gurley and Shaw's  thesis implies that a proliferation of money-like assets resulting from financial innovations increased the interest elasticity of money demand. However, Hafer and Hein  provided empirical evidence to the contrary. This paper presents the empirical results of the M2 demand for money using an error correction model for the period 1959:1–87:4 and two subperiods 1959:1–73:4 and 1974:1–87:4. The findings suggest lower interest and price elasticities for money demand in the second sample in which money substitutes proliferated. Copyright International Atlantic Economic Society 1997
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Volume (Year): 25 (1997)
Issue (Month): 2 (June)
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