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On the impossibility of a stable and low GDP elasticity of money demand: the arithmetic of aggregation, replication and income growth

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  • Clinton Greene

Abstract

This paper shows the aggregate income (GDP) elasticity of money demand depends on the elasticity at the individual level and on population growth. As money regressions are usually formulated using US post-WW.II data, a low and stable aggregate income elasticity implies a negative and unstable elasticity at the individual level. Likewise positing a stable and non-unitary individual income elasticity implies wide variation in the conventional GDP elasticity over time. It has been possible to ignore these issues in empirical work due to collinearity between regressors and population, even for differenced data. Measuring money and income on a per household basis is a simple way to avoid these problems and to distinguish income from mere replication effects.

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  • Clinton Greene, 1999. "On the impossibility of a stable and low GDP elasticity of money demand: the arithmetic of aggregation, replication and income growth," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1119-1127.
    • Handle: RePEc:taf:applec:v:31:y:1999:i:9:p:1119-1127
    DOI: 10.1080/000368499323607
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    References listed on IDEAS

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    1. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
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    9. Yoshihisa Baba & David F. Hendry & Ross M. Starr, 1992. "The Demand for M1 in the U.S.A., 1960–1988," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 25-61.
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    Cited by:

    1. Carl Mela & Praveen Kopalle, 2002. "The impact of collinearity on regression analysis: the asymmetric effect of negative and positive correlations," Applied Economics, Taylor & Francis Journals, vol. 34(6), pages 667-677.

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