Over the last 20 years, the Korean financial environment has changed drastically, and it continues to change. Three broad categories of empirical facts are responsible for the fundamental transformation in the financial environment. The first is the phenomenal growth in the organized capital market (especially nonbank financial institutions, or NBFI), which was launched by government initiative in the 1970s. This initiative partially deregulated interest rates and authorized the creation of new financial institutions, leading in turn to significantly higher real returns and the creation of new financial instruments. This suggests that interest rates in the regulated capital market better reflect financial market conditions. 1 Such changes have had profound effects on, for example, the transmission channel between monetary policy and money demand behavior. The second fact is the development of new categories of financial assets and new means of payment such as credit cards, checking accounts, and automatic transfer systems. This change in the financial environment has brought about a generalized substitution phenomenon among the various financial assets. Finally, the two aforementioned circumstances have contributed to the growth trends of the various monetary aggregates, namely, Ml, M2, and M3, which have shown diverse patterns since the latter part of the 1970s. For example, Ml growth has shown marked volatility but with a recent downward trend, while M3 has shown stable and steady growth. Moreover, households and corporations have exhibited different patterns of behavior in their demands for monetary aggregates. The predictability of money demand behavior is essential in making sound monetary policy. The purpose of this article is to derive and compare first the money demand behavior of households and corporations and, second, the effects of changes in monetary instruments on money demand behavior. The adopted approach is to set