Conclusions

Abstract

Concerning the modelling of the demand for money using the buffer stock model, this book has posed two questions which are of prime importance if credible policy prescriptions are to follow from the results. The first question was: what definition of money, broad or narrow, is the definition which gives a true reflection of buffering behaviour? and the second was: do the different sectors of the economy behave differently and are there gains to be had by estimating the buffer stock models separately for each sector? The answers in the previous chapters indicated that broad definitions of the money stock have more appeal as buffer stocks than narrow ones, and in the case of the company sector the definition was wider still, including bank borrowing. This latter point illustrates that it is clearly inadequate to model the money demand equation in aggregate alone, since there is a wealth of information concealed by this method. The analysis of demand for money within each sector demonstrates that there are, as one might expect, very great differences between them — the company sector has a wider range of assets and liabilities to draw on and does so in response to shocks compared to the personal sector. A model of the aggregate demand for money would conceal this difference which, from a policy point of view, is an important distinction to make.