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Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates

  • John B. Carlson
  • Dennis L. Hoffman
  • Benjamin D. Keen
  • Robert H. Rasche

There is strong evidence of a stable “money demand” relationship for MZM and M2 through the 1990s. Though the M2 relationship breaks down somewhere around 1990, evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in M2 velocity that began around 1990 and was largely over by 1994. This paper’s results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds. This reallocation may have been induced by depository restructuring, but it could also be explained by appropriately measured opportunity cost.

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File URL: http://www.clevelandfed.org/research/workpaper/1999/Wp9917.pdf
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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9917.

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Date of creation: 1999
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Handle: RePEc:fip:fedcwp:9917
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  1. James H. Stock & Martin Feldstein, 1994. "Measuring Money Growth When Financial Markets Are Changing," NBER Working Papers 4888, National Bureau of Economic Research, Inc.
  2. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters, in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
  3. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  4. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  5. Cara Lown & Stavros Peristiani & Kenneth J. Robinson, 1999. "What was behind the M2 breakdown?," Financial Industry Studies Working Paper 99-2, Federal Reserve Bank of Dallas.
  6. John Wenninger & John Partlan, 1992. "Small time deposits and the recent weakness in M2," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 21-35.
  7. Yash P. Mehra, 1997. "A review of the recent behavior of M2 demand," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-44.
  8. Dennis Hoffman & Robert H. Rasche, 1989. "Long-run Income and Interest Elasticities of Money Demand in the United States," NBER Working Papers 2949, National Bureau of Economic Research, Inc.
  9. Athanasios Orphanides & Richard Porter, 1998. "P* revisited: money-based inflation forecasts with a changing equilibrium velocity," Finance and Economics Discussion Series 1998-26, Board of Governors of the Federal Reserve System (U.S.).
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  11. repec:cup:etheor:v:11:y:1995:i:5:p:984-1014 is not listed on IDEAS
  12. Robert Darin & Robert L. Hetzel, 1994. "A shift-adjusted M2 indicator for monetary policy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 25-48.
  13. Joshua N. Feinman & Richard D. Porter, 1992. "The continuing weakness in the M2," Finance and Economics Discussion Series 209, Board of Governors of the Federal Reserve System (U.S.).
  14. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
  15. Stock, James & Feldstein, Martin, 1996. "Measuring Money Growth When Financial Markets are Changing," Scholarly Articles 2799053, Harvard University Department of Economics.
  16. John V. Duca, 1992. "The case of the "missing M2."," Research Paper 9202, Federal Reserve Bank of Dallas.
  17. Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, vol. 11(05), pages 984-1014, October.
  18. John B. Carlson & Sharon E. Parrott, 1991. "The demand for M2, opportunity cost, and financial change," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-11.
  19. Duca, John V., 1995. "Should bond funds be added to M2?," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 131-152, April.
  20. Miyao, Ryuzo, 1996. "Does a Cointegrating M2 Demand Relation Really Exist in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 365-80, August.
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