Changes In Demand For Money Research Articles

Optimism-pessimism effects on money demand: theory and evidence

PurposeThe purpose of this paper is to investigate, both theoretically and empirically, the relationship between optimism (pessimism) – as reflected by animal spirits – and money demand by taking into account transaction costs.Design/methodology/approachInspired by the theoretical model of money demand by Teles et al. (2016) the authors incorporate the optimism (pessimism) effects in the money demand. Then, using the consumers’ confidence indicator as a proxy indicator of optimism/pessimism, they estimate the money demand in a panel data framework.FindingsThe theoretical framework suggests that the optimism (pessimism) effects on money demand are positive (negative). Empirical evidence for 11 Eurozone countries divided in two groups (i.e. core and periphery) confirms the theoretical considerations.Practical implicationsIt appears that periphery countries with a higher sensitivity to the recent financial crisis present lower real money demand sensitivity to consumption expenditures and higher real money demand sensitivity to consumer confidence index. Moreover, in such countries, money demand changes present higher persistence over time. Thus, the authors observe differing attitudes concerning money demand across Eurozone citizens that should be taken into account by monetary policymakers (i.e. the ECB).Originality/valueThe authors introduce, in the vast literature on money demand, both theoretically and empirically the role of optimism (pessimism). Differences across core and periphery Eurozone countries identified.

Comparing the Forecasts of Money Demand

The demand for money depends positively on the price level and real income, and negatively on nominal interest rates and wealth. In addition, since the amount of wealth in an economy is fixed, an individual's or firm's wealth is typically tied up between money and bonds. When one of these markets is in equilibrium, so is the other and resultantly money supply is equal to money demand at a particular interest rate. The interest rate affects the movement of the money supply, and Federal Reserve Bank policy influences the short-term interest rate. Monetary policy also affects the price level, while real income in turn affects the movement of money demand. The interaction of money supply and demand leads to a series of equilibriums in the money market. This paper is concerned with the forecasting of money demand changes relative to levels and using price level/inflation, real income, wealth, and interest rate as independent variables. Money demand is approximated by the quantity of M2 money stock, and the price level and interest rate are represented by the consumer price index and 3-month Treasury bills respectively. The forecasting tools used are neural networks and robust multiple linear regression. The efficacy and relative accuracy of the forecasts are determined by performance metrics correlation, root mean square error, and visual analysis. As expected, neural networks yielded a better overall forecast of the changes in money demand.

Monetary equilibrium and price stickiness reconsidered: A reply to Bagus and Howden

Bagus and Howden (Review of Austrian Economics 24(4): 383–402, 2011) argue that price stickiness is a poor justification for advocating a flexible money supply through the issuing of fiduciary media under central or free banking. They view the contraction in output following an exogenous increase in money demand as an optimal response, worry about redistribution effects from the issuance of fiduciary media, and claim a changing money supply complicates economic calculation. Accepting their view that the contraction in output is an optimal response to an exogenous change in money demand, we still find a potentially beneficial role for monetary policy (under central banking) or fractional reserve note issue (under free banking). We show that even if all prices were perfectly flexible, changes in the money supply to offset changes in money demand might still be desirable. We point out several errors and mischaracterizations in their article, justify our decision to disregard wealth transfers, and discuss how a flexible money supply might facilitate economic calculation.

Two Exercises of Inflation Modelling and Forecasting for Azerbaijan

The paper proposes two econometric models of inflation for Azerbaijan: one based on monthly data and eclectic, another based on quarterly data and takes into account disequilibrium at the money market. Inflation regression based on monthly data showed that consumer prices dynamics is explained by money growth (the more money, the higher the inflation), exchange rate behaviour (appreciation drives disinflation), commodities price dynamics (“imported” inflation) and administrative changes in regulated prices. For the quarterly model, nominal money demand equation (with inflation, real non-oil GDP and nominal interest rate on foreign currency deposits as predictors) and money supply equation were estimated, and error-correction mechanism from money demand equation was included into inflation equation. It is shown that disequilibrium at the money market (supply higher than demand) drives inflation together with money supply growth and nominal exchange rate depreciation and administrative changes in prices.No cost-push variables appeared to be significant in this equation specification. Both models give similar inflation projections, but sudden changes in money demand (2012) lead to significant differences between the projections. It is shown that money is the most important inflation determinant that explains up to 97.8% of CPI growth between 2012 and 2015, and that in order to keep inflation under control the Central Bank of Azerbaijan should link money supply to real non-oil GDP growth.

Monetary Equilibrium and Price Stickiness Reconsidered: A Reply to Bagus and Howden

Bagus and Howden (2011) argue that price stickiness is a poor justification for advocating a flexible money supply through the issuing of fiduciary media under central or free banking. They view the contraction in output following an exogenous increase in money demand as an optimal response, worry about redistribution effects from the issuance of fiduciary media, and claim a changing money supply complicates economic calculation. Accepting their view that the contraction in output is an optimal response to an exogenous change in money demand, we still find a potentially beneficial role for monetary policy (under central banking) or fractional reserve note issue (under free banking). We show that even if all prices were perfectly flexible, changes in the money supply to offset changes in money demand might still be desirable. We point out several errors and mischaracterizations in their article, justify our decision to disregard wealth transfers, and discuss how a flexible money supply might facilitate economic calculation.

Dynamic modeling of stability of money demand and minimum wages

Dynamic modeling is a vital policy instrument in measuring macroeconomic stability of the economy and monetary planning. This study was conducted to explore long term dynamic behavior of the narrow money supply to investigate the nexus between money demand and minimum wages and their impact on macroeconomic stability in Sri Lanka. The empirical approach was directed to estimate a Vector Auto regression (VAR) function through unit root and cointegration, and vector error correction models. The coefficients of the Vector Error Correction Model (VECM) were used to determine the long term elasticity of the dynamic model, and impulse response function was derived to examine the stability of the macroeconomic equilibrium. The multiplier effect depicted that though 72 percent of the long-run effect can be found, minimum wage on money demand, time adjustment of wage is sluggish compared to money demand changes. The impulse response behavior of the minimum wage underscored the macroeconomic stability of the wage-money demand adoption in Sri Lanka. Finally, monetary policy implications were recommended for the relevant entities to adjust minimum wage with the money demand to preserve the narrow money supply. Key words: Dynamic modeling, money demand, minimum wage, impulse response function.

The long and short of money: short-run dynamics within a structural model

Empirical examinations into aggregate money demand functions, generally, incorporate a monetary aggregate as the dependent variable. While this custom may be inefficient, it does not create any new difficulties for estimating the demand function's long-run parameters, as money supply would equal money demand. The short-run estimates, however, are not as fortunate. As the monetary aggregate is a measure of supply and not demand, one needs to tease out the short-run responses associated with money demand changes with those which are associated with monetary supply shocks. The present article, therefore, proposes a more complete representation of monetary sector behaviour and in doing so, finds significant support for the so-called buffer stock money demand models.

Shrinking money: the demand for money and the nonneutrality of money

We evaluate the macroeconomic implications of post-World War II money demand changes in two business cycle models: the limited participation model and the sticky price model. The sticky price model is invariant to changes in money demands. However, the limited participation model predicts the effect of a money shock on output rose by 100 percent between 1952 and 1980, and subsequently fell 65 percent. This prediction is hard to reconcile with evidence that suggests the effects of monetary shocks are stable over time, and suggests that goods market imperfections, rather than asset market imperfections, may be the driving force behind postwar U.S. monetary nonneutrality.

Money Demand and Seigniorage-Maximizing Inflation

Conventional estimates of the seigniorage-maximizing inflation rate often make use of the Cagan form, which implies a constant semielasticity of money demand with respect to inflation. This paper shows that the elasticity of substitution in transactions between money and bonds determines how the inflation semielasticity of money demand changes as inflation rises. Allowing for a variable semielasticity, estimates of seigniorage-maximizing inflation for a panel of eleven high-inflation countries are lower than those obtained by using the Cagan form. Estimates based on the correct measure of the opportunity cost of money also differ sharply from those obtained when using conventional inflation measures. Copyright 1995 by Ohio State University Press.

Shocks: A comment

This paper presents a broad indictment of the state of our knowledge in macroeconomics. It argues that we do not know the source of most of the fluctuations in GNP. There is a sense in which the paper must be right as a description of our field as a whole. Our obvious lack of consensus on the sources of GNP fluctuations shows that, whether particular individuals know a lot about these issues or not, our collective knowledge is paltry. But Cochrane goes much farther. He argues that he can prove that the two principal suspects, namely technology and monetary shocks, cannot be very important. He then goes on to say that the shocks that really matter may be ones that we will never be able to identify with an observable exogenous variable because they simply represent “news” about the future that is reflected first in current endogenous variables. In the process of making these points, Cochrane amasses a vast amount of evidence about the aggregate U.S. time series. I learned a great deal from this and expect others to do so as well. My discussion, however, will concern itself first with asking whether the evidence really supports the view that technology and monetary shocks must be unimportant. Then I will talk about the effect of the “news” shock that Cochrane proposes in this paper. Finally, I will close with a general discussion of what sort of model is needed to rationalize the relationship between variables such as C/Y and subsequent movements in output. There is a vast literature that uses aggregate U.S. data to study whether monetary disturbances have any effect on economic activity. This literature has long grappled with the issue of how to measure monetary disturbances. For a variety of reasons, innovations in standard monetary aggregates are unlikely to be perfect measures of such shocks. One reason for this is that the Fed accommodates changes in money demand. Another reason is that aggregates such as M2, whose components have very different time series

Money Demand, Bank Credit, and Economic Performance in Former Socialist Economies

This paper examines factors determining the allocation of bank credit to the enterprise sector, and the implications of this allocation for aggregate supply and macro-economic performance, in the former socialist economies. It first develops a model to explain how changes in demand for money by the household sector directly influence the availability of working capital, which in turn determines aggregate output and employment. It then examines factors influencing the allocation of bank credit between enterprises and other borrowers, in particular the government. Finally, the paper discusses relative merits of bank finance and equity capital in financing medium- and long-term investment, and constraints on the development of efficient equity markets.

Money Demand, Bank Credit, and Economic Performance in Former Socialist Economies

This paper examines factors determining the allocation of bank credit to the enterprise sector, and the implications of this allocation for aggregate supply and macro-economic performance, in the former socialist economies. It first develops a model to explain how changes in demand for money by the household sector directly influence the availability of working capital, which in turn determines aggregate output and employment. It then examines factors influencing the allocation of bank credit between enterprises and other borrowers, in particular the government. Finally, the paper discusses relative merits of bank finance and equity capital in financing medium- and long-term investment, and constraints on the development of efficient equity markets.

Money Demand, Bank Credit, and Economic Performance in Former Socialist Economies

This paper examines factors determining the allocation of bank credit to the enterprise sector, and the implications of this allocation for aggregate supply and macro-economic performance, in the former socialist economies. It first develops a model to explain how changes in demand for money by the household sector directly influence the availability of working capital, which in turn determines aggregate output and employment. It then examines factors influencing the allocation of bank credit between enterprises and other borrowers, in particular the government. Finally, the paper discusses relative merits of bank finance and equity capital in financing medium- and long-term investment, and constraints on the development of efficient equity markets.

CROSS‐COUNTRY ESTIMATES OF THE DEMAND FOR MONEY AND ITS COMPONENTS

The demand for money aggregates (M1, M2) and their components (currency, demand deposits, and time deposits) are estimated using a sample of 103 countries at two time periods. Money demand is found to be affected by age, literacy, industrial development, and political structure, as well as income and inflation. This expanded demand function helps to explain the considerable changes in money demand that have occurred over long periods and the large variation in money demand found across countries. The knowledge thus gained is useful for understanding differences in monetary and taxation policies across countries.