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

  • Gordon de Brouwer

    (Reserve Bank of Australia)

  • Irene Ng

    (Reserve Bank of Australia)

  • Robert Subbaraman

    (Reserve Bank of Australia)

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    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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    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
    Date of revision:
    Handle: RePEc:rba:rbardp:rdp9314
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    6. 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.
    7. 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.
    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. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
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    11. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
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    18. 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.
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