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The recent financial deregulation and the interest elasticity of the simple M1 demand function : an empirical note

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  • Yash P. Mehra

Abstract

The main objective of this note is to examine whether the interest elasticity of money demand has increased during the last few years. A simple money demand regression that includes additional intercept and slope dummy variables defined over the interval 1981.01 to 1985.03 is estimated for the whole sample period 1961.01-1985.03. The regression results show that the elasticity of money demand with respect to market interest rates has for now increased. No shifts are detected in income and time trend elasticities. The in-sample predictions of the more interest-sensitive money demand regression are broadly consistent with the actual behavior of Ml observed so far in the 1980s. The residuals also suggest that the MI demand function has been subject to transitory shocks over the same period.

Suggested Citation

  • Yash P. Mehra, 1985. "The recent financial deregulation and the interest elasticity of the simple M1 demand function : an empirical note," Working Paper 85-03, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:85-03
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    References listed on IDEAS

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    1. Phillip Cagan & Anna J. Schwartz, 1987. "Has the Growth of Money Substitutes Hindered Monetary Policy?," NBER Chapters,in: Money in Historical Perspective, pages 209-233 National Bureau of Economic Research, Inc.
    2. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    3. Goodfriend, Marvin, 1985. "Reinterpreting money demand regressions," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 207-241, January.
    4. Michael Dotsey, 1983. "The effects of cash management practices on the demand for demand deposits," Working Paper 83-02, Federal Reserve Bank of Richmond.
    5. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
    6. Klein, Benjamin, 1974. "Competitive Interest Payments on Bank Deposits and the Long-Run Demand for Money," American Economic Review, American Economic Association, vol. 64(6), pages 931-949, December.
    7. Carlson, John A & Frew, James R, 1980. "Money Demand Responsiveness to the Rate of Return on Money: A Methodological Critique," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 598-607, June.
    8. R. W. Hafer & Scott E. Hein, 1982. "Financial innovations and the interest elasticity of money demand: some historical evidence," Working Papers 1982-011, Federal Reserve Bank of St. Louis.
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    Keywords

    Money;

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