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A Money Demand Function with Output Uncertainty, Monetary Uncertainty, and Financial Innovations

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  • Choi, Woon Gyu
  • Oh, Seonghwan

Abstract

In a general equilibrium framework incorporating the money-in-the-utility function approach, we show that output uncertainty and monetary uncertainty as well as output, interest rates, and financial innovations affect money demand. The estimated long-run relationships are consistent with our postulated relation but not with the conventional one. Our model delivers a high income elasticity consistent with cross-sectional evidence and helps resolve MI demand puzzles. The model estimated in dynamic error correction form exhibits a good level of stability and forecastability, providing little support for the recent de-emphasis of monetary aggregates due to the instability of money demand.

Suggested Citation

  • Choi, Woon Gyu & Oh, Seonghwan, 2003. "A Money Demand Function with Output Uncertainty, Monetary Uncertainty, and Financial Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 685-709, October.
    • Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:5:p:685-709
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