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The Demand for Money in Australia: New Tests on an Old Topic

Author Info

  • Gordon de Brouwer

    (Reserve Bank of Australia)

  • Irene Ng

    (Reserve Bank of Australia)

  • Robert Subbaraman

    (Reserve Bank of Australia)

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    Abstract

    The breakdown of conventional short-run demand functions for money in a number of countries, including Australia, is well known. In recent years, there has been a rush of publications, both overseas and in Australia, concerning the long-run relationships between the money stock, activity and interest rates, utilising the technique of cointegration. This paper seeks to contribute to knowledge about these empirical relationships, and their robustness. It reviews some basics of money demand theory, summarises the results of earlier papers on cointegrating relationships in the Australian data and tests for the existence of cointegration between a number of definitions of money aggregates, activity and interest rates. This very wide-ranging investigation is designed to explore the sensitivity of relationships to sensible specification changes. Cointegration between money, income and interest rates is difficult to find, and the outcomes are sensitive to the definition of activity and interest rate and to the testing procedure.

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    File URL: http://www.rba.gov.au/publications/rdp/1993/pdf/rdp9314.pdf
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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9314.

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    Date of creation: Dec 1993
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    Handle: RePEc:rba:rbardp:rdp9314
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    1. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
    2. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    3. Doug McTaggart & Colin Rogers, 1990. "Monetary Policy and the Terms of Trade: A Case for Monetary Base Control in Australia?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 23(2), pages 38-49.
    4. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-44, December.
    5. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
    6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    8. Neil R. Ericsson & Julia Campos & Hong-Anh Tran, 1991. "PC-give and David Hendry's econometric methodology," International Finance Discussion Papers 406, Board of Governors of the Federal Reserve System (U.S.).
    9. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    10. Stephen Grenville, 1990. "The Operation of Monetary Policy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 23(2), pages 6-16.
    11. Hendry, David F. & Ericsson, Neil R., 1991. "Modeling the demand for narrow money in the United Kingdom and the United States," European Economic Review, Elsevier, vol. 35(4), pages 833-881, May.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    13. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    14. Juselius, K., 1991. "Long-Run Relations in Australian Monetary Data," Papers 238, Australian National University - Department of Economics.
    15. Ian R. Harper, 1988. "Monetary Policy in a Deregulated Financial System," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 21(4), pages 58-63.
    16. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
    17. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
    18. Adrian Blundell-Wignall & Susan Thorp, 1987. "Money Demand, Own Interest Rates and Deregulation," RBA Research Discussion Papers rdp8703, Reserve Bank of Australia.
    19. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    20. Orden, David & Fisher, Lance A, 1993. "Financial Deregulation and the Dynamics of Money, Prices, and Output in New Zealand and Australia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 273-92, May.
    21. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
    22. Baba, Yoshihisa & Hendry, David F & Starr, Ross M, 1992. "The Demand for M1 in the U.S.A., 1960-1988," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 25-61, January.
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