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Exogeneity within the M2 Demand Function: Evidence from a Large Macroeconomic System

  • Martin B. Schmidt

A large body of literature investigates whether a stable and predictable long-run association between money and its arguments exists. One point of variation between models is whether to include an interest rate measure directly within the long-run relationship. Several recent studies indicate that empirical findings are sensitive to the choice. Therefore, the present article reexamines the empirical significance of the interest rate within a four-equation macroeconomic system. The results suggest that the interest rate (1) may be excluded from the M2 demand function, (2) is strongly exogenous to most of the system's remaining variables, and (3) may represent a common trend. (JEL E41, E52, C32) Copyright 2004, Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 42 (2004)
Issue (Month): 4 (October)
Pages: 634-646

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Handle: RePEc:oup:ecinqu:v:42:y:2004:i:4:p:634-646
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