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Financial Market Risk and U.S. Money Demand

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  • Mr. David Cook
  • Woon Gyu Choi

Abstract

This paper examines empirically U.S. broad money demand emphasizing the role of financial market risk. We find that money demand rises with the liquidity risk of stock markets or the credit risk of corporate bond markets. After controlling for the effect of financial market risk, money demand becomes relatively stable over the last 35 years. At the sectoral level, household money holdings continue to be stable in a traditional model controlling for a decline in transactions costs for investing in mutual funds in the early 1990s. In contrast, business money holdings have been consistently (positively) associated with credit risk.

Suggested Citation

  • Mr. David Cook & Woon Gyu Choi, 2007. "Financial Market Risk and U.S. Money Demand," IMF Working Papers 2007/089, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2007/089
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    2. Dreger, Christian & Wolters, Jürgen, 2015. "Unconventional monetary policy and money demand," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 40-54.
    3. De Santis, Roberto A., 2012. "Quantity theory is alive: the role of international portfolio shifts," Working Paper Series 1435, European Central Bank.

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