Abstract
We estimate the money demand function and the money supply function for Canadasimultaneously by the three-stage least squares method. The inflation gap and the output gap are incorporated in the money supply function. Real money demand is positively affected by real GDP and negatively associated with the Treasury bill rate and the nominal effecttive exchange rate. Real money supply is positively influenced by the Treasury bill rate and negatively impacted by the inflation gap and the output gap.
Highlights
The demand for money has been examined extensively
Real M2, real GDP and the nominal exchange rate are measured in the log form whereas the Treasury bill rate [7], the inflation gap and the output gap are specified in the level form due to negative values before or after taking the log of these variables
This paper has examined the money demand function and the money supply function for Canada simultaneously
Summary
The demand for money has been examined extensively. Early seminal works include Chow (1966) [1], Saving (1971) [2], Goldfeld, Duesenberry and Poole (1973) [3], Laidler (1977) [4], Judd and Scadding (1982) [5], Gordon (1984) [6], Fair (1987) [7], Hafer and Jensen (1991) [8], and others. Studies for Canada and related countries include the focus on the stability [9,10,11], currency substitution [12,13,14,15,16,17], monetary policy [18], economic policies [19], nominal and real adjustments [20], simultaneity [21,22,23], etc. To the authors’ knowledge, most of recent studies employ the single-equation method in estimating the money demand function and assume that the money supply is exogenous or is not affected by the interest rate or other related variables. This paper attempts to examine the money demand function and the money supply function for Canada based on a simultaneous-equation model. Estimated regression parameters are consistent, and simultaneity bias would not be present
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