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Modeling U.S. households' demand for liquid wealth in an era of financial change

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  • Richard G. Anderson
  • Sean Collins

Abstract

Money demand models overpredicted M2 growth in the United States from 1990 to 1993. We examine this overprediction using a model of household demand for liquid wealth. The model is a dynamic generalization of the almost-ideal demand model of Deaton and Muellbauer (1980). We find that the own-price elasticity of money demand rose substantially after 1990. We also find important cross-price elasticities of money with respect to other liquid financial assets, notably with respect to mutual funds. Incorporating these and other features helps explain nearly 50 percent of the shortfall in M2 growth over the period in question. It also suggests that households respond more rapidly to changes in market interest rates than is assumed in some limited-participation general equilibrium macroeconomic models.

Suggested Citation

  • Richard G. Anderson & Sean Collins, 1997. "Modeling U.S. households' demand for liquid wealth in an era of financial change," Working Papers 1997-014, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1997-014
    DOI: 10.20955/wp.1997.014
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    1. Franz Seitz & Julian von Landesberger, 2014. "Household Money Holdings in the Euro Area: An Explorative Investigation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 83-115.
    2. Gillman, Max & Otto, Glenn, 2003. "Money demand in a banking time economy," HWWA Discussion Papers 254, Hamburg Institute of International Economics (HWWA).
    3. Caner, M. & Kilian, L., 2001. "Size distortions of tests of the null hypothesis of stationarity: evidence and implications for the PPP debate," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 639-657, October.
    4. Franz Seitz & Julian von Landesberger, 2012. "Household Money Demand: The Euro Area Case," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(III), pages 409-438, September.
    5. Tomoe Moore & Christopher Green & Victor Murinde, 2005. "Portfolio Behaviour in a Flow of Funds Model for the Household Sector in India," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 675-702.
    6. Tomoe Moore & Christopher Green, 2005. "Other financial institutions' portfolio behaviour and policy implications: A study of India," International Economic Journal, Taylor & Francis Journals, vol. 19(4), pages 543-562.

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