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A Systemic Approach to Money Demand Modeling

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  • Mauricio Calani
  • J. Rodrigo Fuentes
  • Klaus Schmidt-Hebbel

Abstract

This paper uses a consumer theory-based systemic approach to model the demand for monetary liquid asset holdings. We implement the suggestions and caveats of aggregation theory for the estimation of a demand system for liquid assets (monies) in static, dynamic and time-varying parameters setups. Our results are robust and theoretically consistent with consumer theory restrictions, as system derived from a utility maximizing framework and a well-behaved utility function. In our estimations we find stability of interest-rate and total-expenditure elasticities, in contrast to previous literature. We also document evidence that long (short) maturity rates are associated to less (more) liquid assets and that the vigorous growth of M1 during the last five of years is not accounted for by low interest rates alone. Policy implications are straightforward; there is stable relationship between monies and interest rates, but the former do not respond exclusively to the latter.

Suggested Citation

  • Mauricio Calani & J. Rodrigo Fuentes & Klaus Schmidt-Hebbel, 2008. "A Systemic Approach to Money Demand Modeling," Working Papers Central Bank of Chile 512, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:512
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    References listed on IDEAS

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    1. William A. Barnett & Douglas Fisher & Apostolos Serletis, 2006. "Consumer Theory and the Demand for Money," World Scientific Book Chapters,in: Money And The Economy, chapter 1, pages 3-43 World Scientific Publishing Co. Pte. Ltd..
    2. Li, Gang & Song, Haiyan & Witt, Stephen F., 2006. "Time varying parameter and fixed parameter linear AIDS: An application to tourism demand forecasting," International Journal of Forecasting, Elsevier, vol. 22(1), pages 57-71.
    3. Adolf Buse, 1994. "Evaluating the Linearized Almost Ideal Demand System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(4), pages 781-793.
    4. Orbe, Susan & Ferreira, Eva & Rodriguez-Poo, Juan, 2003. "An algorithm to estimate time-varying parameter SURE models under different types of restriction," Computational Statistics & Data Analysis, Elsevier, vol. 42(3), pages 363-383, March.
    5. Richard G. Anderson & Barry E. Jones & Travis D. Nesmith, 1996. "Monetary aggregation theory and statistical index numbers," Working Papers 1996-007, Federal Reserve Bank of St. Louis.
    6. Offenbacher, Edward K., 1980. "Economic monetary aggregates--comment," Journal of Econometrics, Elsevier, vol. 14(1), pages 55-56, September.
    7. Serletis, Apostolos, 1991. "Modeling the demand for consumption goods and liquid assets," Journal of Macroeconomics, Elsevier, vol. 13(3), pages 435-457.
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