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Measuring Income Elasticity for Swiss Money Demand: What Do the Cantons Say About Financial Innovation?

  • Fischer, Andreas M

Recent time-series evidence has reconfirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5050.

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Date of creation: May 2005
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Handle: RePEc:cpr:ceprdp:5050
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  1. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  2. Casey B. Mulligan, 1997. "The demand for money by firms: some additional empirical results," Discussion Paper / Institute for Empirical Macroeconomics 125, Federal Reserve Bank of Minneapolis.
  3. Reynard, Samuel, 2004. "Financial market participation and the apparent instability of money demand," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1297-1317, September.
  4. Bover, Olympia & Watson, Nadine, 2001. "Are there Economies of Scale in the Demand for Money by Firms? Some Panel Data Estimates," CEPR Discussion Papers 2818, C.E.P.R. Discussion Papers.
  5. Michel Peytrignet & Christof Stahel, 1998. "Stability of money demand in Switzerland: A comparison of the M2 and M3 cases," Empirical Economics, Springer, vol. 23(3), pages 437-454.
  6. Ernst Baltensperger & Thomas Jordan & Marcel Savioz, 2001. "The demand for M3 and inflation forecasts: An empirical analysis for Switzerland," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(2), pages 244-272, June.
  7. Casey B. Mulligan & Xavier Sala-I-Martin, 1992. "U.S. Money Demand: Surprising Cross-Sectional Estimates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 285-343.
  8. Hiroshi Fujiki & Casey B. Mulligan, 1996. "A Structural Analysis of Money Demand: Cross-Sectional Evidence from Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 14(2), pages 53-78, December.
  9. Fujiki, Hiroshi, 2002. "Money Demand near Zero Interest Rate: Evidence from Regional Data," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(2), pages 25-41, April.
  10. Fischer, Andreas M & Peytrignet, Michel, 1991. "The Lucas Critique in Light of Swiss Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(4), pages 481-93, November.
  11. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1061-79, October.
  12. Andreas M. Fischer & Michel Peytrignet, 1990. "Are Larger Monetary Aggregates Interesting? Some Exploratory Evidence for Switzerland Using Feedback Models," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 126(IV), pages 505-520, December.
  13. Fujiki, Hiroshi & Hsiao, Cheng & Shen, Yan, 2002. "Is There a Stable Money Demand Function under the Low Interest Rate Policy? A Panel Data Analysis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(2), pages 1-23, April.
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