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Dynamics of the demand for money and uncertainty : The U.S. demand for money revisited


  • Koskela, Erkki
  • Virén, Matti


The purpose of the paper is to revisit the demand for money specifiections by using U.S. quarterly data over the sample period 1951:1 - 1983:4. Utilizing the so-called threshold models suggested by Tong and Lim (1980) we first demonstrate the unsatisfactory performance of standard linear partial adjustment type specifications. Then we turn to compare error correetion type models; the generalized error correetion type demand for money model seems to outperform other specifications, but suffer from heteroscedasticity of residuals. Finally, an attempt is made with some success to account for this heteroscedasticity by augmented variables - variance of nominal interest rate and inflation and covariance between nominal interestrate and inflation - which attempt to measure changes in uncertainty over time. The resulting specification passes all standard diagnostic checks and shows also otherwise reasonable properties.

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  • Koskela, Erkki & Virén, Matti, 1988. "Dynamics of the demand for money and uncertainty : The U.S. demand for money revisited," Research Discussion Papers 4/1988, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:1988_004

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    References listed on IDEAS

    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    2. Santomero, Anthony M & Seater, John J, 1981. "Partial Adjustment in the Demand for Money: Theory and Empirics," American Economic Review, American Economic Association, vol. 71(4), pages 566-578, September.
    3. Geweke, John & Meese, Richard, 1981. "Estimating regression models of finite but unknown order," Journal of Econometrics, Elsevier, vol. 16(1), pages 162-162, May.
    4. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-534, June.
    5. Walsh, Carl E, 1984. "Interest Rate Volatility and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 133-150, May.
    6. Buiter, Willem H & Armstrong, Clive A, 1978. "A Didactic Note on the Transactions Demand for Money and Behavior towards Risk: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(4), pages 529-538, November.
    7. Judd, John P & Scadding, John L, 1982. "The Search for a Stable Money Demand Function: A Survey of the Post-1973 Literature," Journal of Economic Literature, American Economic Association, vol. 20(3), pages 993-1023, September.
    8. Kloek, Teun, 1984. "Dynamic Adjustment When the Target Is Nonstationary," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 315-326, June.
    9. John P. Judd & John L. Scadding, 1982. "The search for a stable money demand function: a survey of the post- 1973 literature," Working Papers in Applied Economic Theory 109, Federal Reserve Bank of San Francisco, revised 1982.
    10. Rose, Andrew K, 1985. "An Alternative Approach to the American Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 439-455, November.
    11. Turnovsky, Stephen J., 1969. "A bayesian approach to the theory of expectations," Journal of Economic Theory, Elsevier, vol. 1(2), pages 220-227, August.
    12. T. Lawson, 1980. "Adaptive Expectations and Uncertainty," Review of Economic Studies, Oxford University Press, vol. 47(2), pages 305-320.
    13. Gregor W. Smith, 1986. "A Dynamic Baumol-Tobin Model of Money Demand," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 465-469.
    14. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-129, May.
    15. Koskela, Erkki & Viren, Matti, 1987. "Inflation, Hedging and the Demand for Money: Some Empirical Evidence," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 251-265, April.
    16. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. Kuosmanen, Hannele & Pyyhtiä, Ilmo & Siiskonen, Reijo, 1988. "The KTKV model of the economics department of the Bank of Finland," Research Discussion Papers 10/1988, Bank of Finland.
    2. Skolnik, Amy, 1988. "The EC internal market : An "economic United States" of Europe," Research Discussion Papers 19/1988, Bank of Finland.

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