Money Demand and Economic Uncertainty
The author examines the impact of economic uncertainty on the demand for money. Using a general-equilibrium theory, he argues that in a world inhabited by risk-averse agents, who are constantly making portfolio decisions against a backdrop of macroeconomic uncertainty, the demand for money is a function of real income and interest rates, and an index of economic uncertainty. The author then uses the Johansen procedure of cointegration to estimate the long-run stationary relationships between a Canadian monetary aggregate (M1, M1++, and M2++) and the explanatory variables. Allowing for an index of economic uncertainty to enter the short-run dynamics of the estimated model, the author obtains empirical results that show that, in general, increased economic uncertainty leads, in the short run, to a rise in the desired M1 and M1++ balances that agents would like to hold. The impact of economic uncertainty on M2++ is, however, observed to be negative.
|Date of creation:||2004|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
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Web page: http://www.bank-banque-canada.ca/
References listed on IDEAS
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- Godbout, M.J. & Van Norden, S., 1996. "Unit-Root Test and Excess Returns," Staff Working Papers 96-10, Bank of Canada.
- Ali Dib, 2003.
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- Ali Dib, 2001. "An Estimated Canadian DSGE Model with Nominal and Real Rigidities," Staff Working Papers 01-26, Bank of Canada.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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- Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-328, August.
- Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 83-108, December.
- Joseph Atta-Mensah, 2004. "The Demand for Money in a Stochastic Environment," Staff Working Papers 04-7, Bank of Canada.
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- 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. Full references (including those not matched with items on IDEAS)