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The Demand for M1 in the U.S.A., 1960–1988


  • Yoshihisa Baba
  • David F. Hendry
  • Ross M. Starr


Estimated U.S. M1 demand functions appear unstable, regularly "breaking down," over 1960–1988 (e.g. missing money, great velocity decline, M1-explosion). We propose a money demand function whose arguments include inflation, real income, long-term bond yield and risk, T-bill interest rates, and learning curve weighted yields on newly introduced instruments in M1 and non-transactions M2. The model is estimated in dynamic error-correction form; it is constant and, with an equation standard error of 0–4%, variance-dominates most previous models. Estimating alternative specifications explains earlier "breakdowns," showing the model's distinctive features to be important in accounting for the data.

Suggested Citation

  • Yoshihisa Baba & David F. Hendry & Ross M. Starr, 1992. "The Demand for M1 in the U.S.A., 1960–1988," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 25-61.
  • Handle: RePEc:oup:restud:v:59:y:1992:i:1:p:25-61.

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