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Time-Varying Money Demand and Real Balance Effects

Author

Listed:
  • Jonathan Benchimol

    (Bank of Israel, Research Department, Jerusalem, Isreal)

  • Irfan Qureshi

    () (Asian Development Bank, Macroeconomics Division, Metro Manila, Philippines)

Abstract

This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that household?s money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the household?s preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend infl?ation. An empirical study of U.S. data revealed that there was a gradual fall in the interest elasticity of money demand of approximately one-third during the 1970s due to high trend in?flation. A further decline in the interest-elasticity of the demand for money was observed in the 1980s due to the changing household preferences that emerged in response to ?financial innovation. These developments led to a reduction in the welfare cost of infl?ation that subsequently explains the rise in monetary neutrality observed in the data.

Suggested Citation

  • Jonathan Benchimol & Irfan Qureshi, 2019. "Time-Varying Money Demand and Real Balance Effects," CFDS Discussion Paper Series 2019/7, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
  • Handle: RePEc:fds:dpaper:201907
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    Keywords

    Time-Varying Money Demand; Real Balance Effect; Welfare Cost of Infl?ation; Monetary Neutrality;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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