The demand for money in Brazil: Some further results

Abstract

A recent paper by Cardoso, using the simple Koyck-adjustment mechanism, has estimated a money demand equation for Brazil. The results are said to show, among other things, that the inflation rate does not play a significant role in the Brazilian money demand function. This paper re-examines and expands on the money demand relationship in Brazil, finding that Cardoso's estimated equations are inherently unstable. Using a less restrictive dynamic adjustment mechanism, an alternative money demand relationship has been estimated for Brazil which proves well-fitting and structurally stable over time. The inflation rates variable, furthermore, is found to exert a significant influence on real money demand in Brazil. In fact, without such a variable, our estimated money demand relationship appears toe misspecified and structurally unstable.