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On the Effect of Government Spending on Money Demand in the United States: An ARDL Cointegration Approach

Author

Listed:
  • Ebadi, Esmaeil

Abstract

This paper sheds light on the effect of government spending on money demand. The conventional literature of money demand has been developed with money demand defined as a function of income, interest rate, exchange rate, and inflation. I propose the new method of income decomposition to the public sector and the private sector following Barro’s (1990) spending model. I include government spending in the conventional money demand function to investigate the impact of government spending on the demand for money. The results confirm the long-run significant effect of government spending on money demand. In addition, I find that money demand tends to be unstable and moves on the edge of structural break during recessions. Moreover, the tendency of instability lasted longer in the early recession of 2000s than in the Great Recession 2007-2008 and the results do not support Friedman’s (1969) idea that the demand for money is “highly stable”. Instead, the findings suggest that money demand is “slightly stable” during recessions.

Suggested Citation

  • Ebadi, Esmaeil, 2018. "On the Effect of Government Spending on Money Demand in the United States: An ARDL Cointegration Approach," MPRA Paper 86399, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:86399
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    File URL: https://mpra.ub.uni-muenchen.de/86399/1/MPRA_paper_86399.pdf
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    References listed on IDEAS

    as
    1. Carlson, John B. & Hoffman, Dennis L. & Keen, Benjamin D. & Rasche, Robert H., 2000. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 345-383, October.
    2. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    3. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
    4. repec:wei:journl:v:8:y:2018:i:1:p:2-10 is not listed on IDEAS
    5. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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    12. Ebadi, Esmaeil, 2018. "On the Measurement of the Government Spending Multiplier in the United States An ARDL Cointegration Approach," MPRA Paper 85459, University Library of Munich, Germany.
    13. repec:spr:cliomt:v:11:y:2017:i:2:d:10.1007_s11698-016-0143-8 is not listed on IDEAS
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    More about this item

    Keywords

    Monetary Policy; Money Demand; Stability; ARDL Cointegration Approach;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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