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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
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  1. repec:cup:cbooks:9780521296762 is not listed on IDEAS
  2. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," NBER Working Papers 3974, National Bureau of Economic Research, Inc.
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  7. 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.
  8. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  9. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 407-36, May.
  10. G. William Schwert, 1988. "Tests For Unit Roots: A Monte Carlo Investigation," NBER Technical Working Papers 0073, National Bureau of Economic Research, Inc.
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  12. 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.
  13. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005.
  14. John V. Duca, 1993. "Should bond funds be included in M2?," Research Paper 9321, Federal Reserve Bank of Dallas.
  15. 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.
  16. Duca, John V., 1990. "The impact of mortgage activity on recent demand deposit growth," Economics Letters, Elsevier, vol. 32(2), pages 157-161, February.
  17. 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.
  18. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  19. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  20. 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.
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