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Modeling U.S. Households' Demands for Liquid Wealth in an Era of Financial Change

  • Collins, Sean
  • Anderson, Richard

Money demand models overpredicted M2 growth in the United States from 1990 to 1993. The authors examine this overprediction using a model of households' demands for liquid wealth. The model is a dynamic generalization of the AIDS model of Angus Deaton and John Muellbauer (1980). The authors find that the own-price elasticity of money rose substantially after 1990. They also find important cross-price elasticities of money with respect to other liquid financial assets, notably with respect to mutual funds. Incorporating these and other features helps explain nearly 50 percent of the shortfall in M2 growth over the period in question.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 30 (1998)
Issue (Month): 1 (February)
Pages: 83-101

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Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:1:p:83-101
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  2. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  3. Schwert, G William, 1989. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(2), pages 147-59, April.
  4. Ng, S. & Perron, P., 1994. "Unit Root Tests ARMA Models with Data Dependent Methods for the Selection of the Truncation Lag," Cahiers de recherche 9423, Universite de Montreal, Departement de sciences economiques.
  5. Anderson, G J & Blundell, R W, 1982. "Estimation and Hypothesis Testing in Dynamic Singular Equation Systems," Econometrica, Econometric Society, vol. 50(6), pages 1559-71, November.
  6. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005.
  7. Ng, S., 1995. "Testing for Homogeneity in Demand Systems when the Regressors Are Non-Stationary," Cahiers de recherche 9516, Universite de Montreal, Departement de sciences economiques.
  8. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
  9. Peter C.B. Phillips & Mico Loretan, 1989. "Estimating Long Run Economic Equilibria," Cowles Foundation Discussion Papers 928, Cowles Foundation for Research in Economics, Yale University.
  10. repec:cup:cbooks:9780521296762 is not listed on IDEAS
  11. James G. MacKinnon, 1992. "Approximate Asymptotic Distribution Functions for Unit Roots and Cointegration Tests," Working Papers 861, Queen's University, Department of Economics.
  12. Duca, John V., 1990. "The impact of mortgage activity on recent demand deposit growth," Economics Letters, Elsevier, vol. 32(2), pages 157-161, February.
  13. John V. Duca, 1993. "Should bond funds be included in M2?," Research Paper 9321, Federal Reserve Bank of Dallas.
  14. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  15. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  16. Anderson, G J, 1991. "Expenditure Allocation across Nondurables, Services, Durables and Savings: An Empirical Study of Separability in the Long Run," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 153-68, April-Jun.
  17. Serletis, Apostolos, 1991. "The Demand for Divisia Money in the United States: A Dynamic Flexible Demand System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 35-52, February.
  18. Chong, Yock Y & Hendry, David F, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 671-90, August.
  19. Patrick I. Mahoney, 1988. "The recent behavior of demand deposits," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 195-208.
  20. Weale, Martin, 1986. "The Structure of Personal Sector Short-term Asset Holdings," The Manchester School of Economic & Social Studies, University of Manchester, vol. 54(2), pages 141-61, June.
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