Income Elasticity Of Money Demand Research Articles

The rise of internet-only banks: Analyzing the bias in cross-prefectural money demand elasticity

In 2021, new bank forms, such as Internet-only banks, amassed 2 % of Japanese deposits. Tokyo’s statistics since 2005 encompass deposits in such banks, regardless of depositor location. These Tokyo-based banks operate branchless. Elevated deposits reported in Tokyo, Japan’s highest-income prefecture, could skew the income elasticity of money demand upwards in a cross-sectional regression. This study proposes reallocating Tokyo’s bank deposits to all prefectures to quantify the bias. Additionally, it suggests aggregating fifteen prefectures into five areas to address discrepancies between the deposit and income locations owing to cross-prefectural commuting. Adjusting for new bank deposits, the income elasticity of money demand decreased from 0.899 to 0.872 in March 2021, with overestimation increasing since March 2005. These findings suggest the adequacy of regional statistics in reflecting economic behavior in the digital era, warranting reevaluation.

Stability of the Money Demand Function Revisited: Evidence from Sierra Leone

The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.

An empirical investigation of stability of money demand for GCC countries

Money demand stability attracts the attention of policy makers while deciding the right policy instrument for the monetary policy. The present study estimates the money demand function by using a time spam of 1980-2014 for the GCC countries. For this purpose, it uses the ARDL cointegration technique to find long-run relationships. The cointegration test has confirmed the long-run relationships in money demand functions for all GCC countries. In the long-run analysis, a positive income elasticity of money demand has been found in all GCC countries. Negative and significant semi-interest rate elasticity has been found in UAE, Bahrain, Qatar and Kuwait. Positive and significant exchange rate elasticity has been found in UAE and KSA and it has found negative in Qatar and Kuwait. Positive and significant inflation rate elasticity has been found in Kuwait and Bahrain and it has found negative in UAE, Oman and KSA. Short-run analysis also reveals some significant elasticities. Further, money demand function proofs stable in KSA and Oman and it remains unstable for the rest of GCC countries.

Meta-analýza důchodové elasticity poptávky po penězích

The income elasticity of money demand is one of the most frequently estimated parameters in economics, but the individual estimates of the elasticity vary a lot. In this paper we present a quantitative survey of the literature estimating this parameter. We collect previous empirical estimates of the elasticity from many studies and analyze why the estimated elasticities differ so much. We test whether the literature is affected by the so-called publication selection bias; that is, if estimates consistent with mainstream theories tend to be published more often. Moreover, we analyze whether the reported estimates of the elasticity differ systematically across countries, estimation methods, and time periods.

Money demand income elasticity in advanced and developing countries: new evidence from meta-analysis

This article extends the meta-analysis presented in Knell and Stix (2005, 2006) to investigate the possible sources of variations in empirical findings about the income elasticity of money demand in advanced and developing countries. In the case of advanced countries, we find that the income elasticities of money demand are significantly higher if broader definitions of the monetary aggregates are used. In addition, financial reforms and wealth seem to have significantly reduced the estimates of the income elasticity. However, we achieved quite different findings for the developing countries. It appears that the broader definitions of monetary aggregates seem to produce income elasticity estimates that are only marginally higher than the narrower aggregates. While the wealth (financial reform) impacts on income elasticity are statistically insignificant (weakly significant), both seems to have reduced the income elasticity estimates only marginally. Moreover, some contrasting results between advanced and developing countries are also attained with respect to the proxies of cost of holding money.

Long-run money demand in OECD countries: what role do common factors play?

This article examines the long-run money demand function for 11 OECD countries from 1983Q1 to 2006Q4 using panel data. The distinction between common factors and idiosyncratic components using principal component analysis allows for the detection of cross-member cointegration and the determination as to whether national or international sources are responsible for the non-stationarity of money and its determinants. Indeed, the finding that the common factors are I(1) while the idiosyncratic components are I(0) indicates that cross-member cointegration may exist and non-stationarity in the variables is primarily driven by common international trends. Furthermore, it is found that the impact of income on money demand is positive, whereas it is negative for the interest rate, exchange rate and stock prices. Except for the income elasticity of money demand, all estimated long-run coefficients are larger for the common factors of the variables than for the variables themselves. This article provides evidence that the exchange rate is an important determinant of money demand, whereas the results for the stock prices are ambiguous. Finally, the results of a panel-based error-correction model suggest that several domestic money stocks converge to a common international equilibrium relationship between the common factors.

Velocity of Money Function for India: Analysis and Interpretations

Velocity of Money, i.e. the ratio of nominal income to the stock of money, is the spread at which the money changes hand in a given financial year. Keynesian and Quantity theories are two competing explanations of the aggregate money demand. The monetarists think that the stability of income velocity of money (V) is important, whereas Keynesian have criticized the notion of stability of velocity of money. Monetarists believe that velocity of money is relatively stable and changes therein are highly predictable. Neo-Keynesians are less confident and argue that either contention is an exaggeration. In this paper the velocity of money function was estimated using annual data for broad money velocity (V3) for the Indian economy covering time period from 1972-2004. Various combinations of the explanatory variables were tried, each with and without the lagged dependent variables. It was found that (i) velocity of broad money [V3] in India turns out to be highly predictable, which corroborates monetarist proposition. Prior knowledge of a set of explanatory variables such as real income, interest rate, the spread of commercial bank branch-network, and past monetary expansions together can explain more than 98 percent of the variation in velocity of broad money (ii) a comparison of the estimated velocity functions, with and without the 'institutional' variables suggests that inclusion of the 'institutional' variables improves the statistical properties of the fit i.e. 2 and Durbin Watson [DW] statistic. This implies that the long run real income elasticity of money demand is significantly reduced when 'institutional' variables are added to the array of the conventional explanatory variables such as real income and interest rate. However, out of the two institutional variables considered, 'population per bank office' is found to be highly significant in all the cases, while the other institutional variable measuring the 'degree of monetization' is not found to be significant.

M3 money demand and excess liquidity in the euro area

Recent empirical studies have found evidence of unstable long run money demand functions if recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In contrast we present a “stable” long run money demand relationship for M3 for the period 1983–2006. To obtain the result, the short run homogeneity restriction between money and prices is relaxed and a break in the income elasticity of money demand after 2001 is taken into account. Measures of excess liquidity do not show significant inflation pressures.

Modeling Base Money Demand and Inflation for the Turkish Economy

Bu calismada, Turkiye ekonomisi icin bir rezerv para talebi modeli olusturulmaya calisilmaktadir. Ucer aylik gozlemleri dikkate alan 1987Q1-2007Q3 inceleme donemi icin cagdas cok degiskenli es-butunlesim yontemi kullanilarak elde ettigimiz bulgular para talebinin reel gelir esnekliginin birim degerden oldukca yuksek oldugunu gostermekte ve ekonomide reel gelir surecindeki artisla ilgili olarak suregelmekte olan parasallasma olgusunun varligini ifade etmektedir. Reel para tutumlari karsisindaki en onemli almasik maliyet unsuru yerli paranin doviz kuru karsisindaki beklenen deger kaybi olarak gozukmektedir. Bu tur bir bulguysa iktisadi birimler parasal buyukluk tutumlariyla ilgili gudulerini belirlerken ekonomide yerlesik para ikamesi olgusunun onemini ortya koymaktadir. Ayrica, calismada elde edilen kritik bir bulgu para piyasasi dengesizlik kosullari altinda meydana gelen para talebi fazlasi uzerine kosullandirilmis dinamik bir hata duzeltme modelini gereksiz kilacak bir sekilde yurtici enflasyonun para talebi degisken uzayinda zayif dissal bir yapiya sahip olmasidir.

The Income Elasticity of Money Demand: A Meta-Analysis of Empirical Results*

Abstract. In this paper, we use meta-analytic methods to investigate possible sources for the large variation in empirical findings about the income elasticity of money demand. Our results suggest that the broadness of the monetary aggregate, the inclusion of wealth and the consideration of financial innovation exert a significant influence on estimated income elasticities. Furthermore, we find substantial cross-country differences, in particular between the US and other countries. These differences can, to some extent, be explained by the macrofeconomic environment and the dissemination of payment cards.

The European Union GDP Forecast Rationality Under Asymmetric Preferences

This paper examines the behaviour of the demand for money in Greece during 1976:1-2000:4, a period that included many of the influences that cause money-demand instability. Two empirical methodologies, vector error correction (VEC) modelling and second-generation random coefficient (RC) modelling, are used to estimate the demand for money. The coefficients of both the VEC and RC procedures support the hypothesis that the demand for money becomes more responsive to both the own rate of return on money balances and the opportunity cost of holding money because of financial deregulation. In general, both procedures also support the hypothesis that the income elasticity of money demand declines over time as a result of technological improvements in the payments system and the development of money substitutes, which lead to economies of scale in holding money.

The stabilization properties of fixed and floating exchange rate regimes

AbstractThis paper investigates the price and output stabilization properties of fixed and floating exchange rates using a small open economy model. The performance of the two regimes is compared in the face of money demand, aggregate demand and aggregate supply shocks. It is shown that the ranking of the two regimes is extremely sensitive to the weighting of the objective function as between price and output stability, the type of shock impinging upon the economy, the values of structural parameters of the economy and institutional features such as the degree of wage indexation within the economy. The results obtained suggest that estimates of the income elasticity of money demand, the elasticity of aggregate demand to changes in both the real exchange rate and the real interest rate, and the degree of openness of the economy are likely to be important to policymakers when making the choice of exchange rate regime. Neither regime can be said to be dominant in all circumstances. Copyright © 2004 John Wiley & Sons, Ltd.

Empirical Modelling of Money Demand in Periods of Structural Change: The Case of Greece*

AbstractThis paper examines the behaviour of the demand for money in Greece during 1976Q1 to 2000Q4, a period that witnessed many of the influences that cause money‐demand instability. Two empirical methodologies, vector error correction (VEC) modelling and second‐generation random coefficient (RC) modelling, are used to estimate the demand for money. The coefficients of both the VEC and RC procedures support the hypothesis that the demand for money becomes more responsive to both the own rate of return on money balances and the opportunity cost of holding money because of financial deregulation. In general, both procedures also support the hypothesis that the income elasticity of money demand declines over time as a result of technological improvements in the payments system and the development of money substitutes, which lead to economies of scale in holding money.

Efficiency Wages and Nominal Income Targeting in an Open Economy

. This paper considers the choice between nominal income and money supply targeting in an open economy with efficiency wages. The results show that, when real unemployment benefits are rigid, both nominal income and money supply targeting have the same stabilizing performance. On the contrary, if nominal unemployment benefits are rigid, then we come to a conclusion that either in the face of goods demand shocks or aggregate supply shocks, a sufficient condition for nominal income targeting to be preferable is that the income elasticity of money demand be less than unity.

STABILITY OF MONEY DEMAND AND MONETARY POLICY IN PAPUA NEW GUINEA (PNG): AN ERROR CORRECTION MODEL ANALYSIS

An error correction model (ECM) is used to study the properties of money demand and to evaluate the appropriate monetary policy in PNG. The study confirms that the determinants of money demand are real GDP, nominal interest and inflation rate. The income elasticity of money demand is very low. The demand for money in PNG was stable during 1979-95, suggesting that the monetary targeting regime by the PNG Central Bank is feasible. However, as PNG proceeds with economic reforms that includes financial sector reform and a floating exchange rate regime, the stability of the demand for money may have to be re-examined periodically. The best approach for conducting the monetary policy in PNG is to target the inflation rate.

Stability of Money Demand and Monetary Policy in Papua New Guinea (PNG): An Error Correction Model Analysis

An error correction model (ECM) is used to study the Properties of money demand and to evaluate the appropriate monetary policy in PNG. The study confirms that the determinats of money demand are real GDP, nominal interest and inflation rate. The income elasticity of money demand is very low. The demand for money in PNG was stable during 1979-95, suggesting that the monetary targeting regime by the PNG Central Bank is feasible. However, as PNG proceeds with economic reforms that Includes financial sector reform and a floating exchange rate regime, the stability of the demand for money may have to be re-examined periodically. The best approach for conducting the monetary policy in PNG is to target the inflation rate. [E41, E52, C22]

Another look at long-run money demand

This paper investigates the long-run demand for M1 in the postwar United States. Previous studies, based on data ending in the late 1980s, are inconclusive about the parameters of postwar money demand. This paper obtains precise estimates of these parameters by extending the data through 1996. The income elasticity of money demand is approximately 0.5, and the interest semi-elasticity is approximately −0.05. These parameters are significantly smaller in absolute value than the corresponding parameters for the prewar period. A caveat is that the analysis assumes there is no trend in money demand resulting from technological change.

Financial Deregulation and Stability of Money Demand: The Australian Case

This paper analyses the Australian economy in the post-war period. The analysis examines stationarity and cointegrating relationship among output, interest rate and money. The analysis shows that Australia has had a stable cointegrating relationship among output, interest rate and money during the post-war period although the country deregulated its financial sector in the 1980's. Australia's money demand function fails to reject the hypothesis that the interest elasticity of money demand is 0.5. In addition, one specification of the country's money demand function fails to reject the hypothesis that the income elasticity of money demand is unity. The specification is the Vector Error Correction Model that includes real output, real balances, an interest rate, and a deregulation dummy variable, with the lag length of three.

Japanese money demand: evidence from regional monthly data

This study estimates the Japanese money demand function by household using seasonally adjusted panel data following Fujiki and Mulligan ( Monetary and Economic Studies, Bank of Japan, vol. 14(1–2), 1996a, 1996b, pp. 65–103, 53–78). The most plausible estimates of the income elasticity of money demand are in the range from 1.28 to 1.35 for the period from 1990 to 1995. These results are robust with respect to the choice of scale variables, and consistent with the estimates based on seasonally unadjusted monthly data and annual data. The stable relationship obtained from regional panel data provides useful information with which to judge the stability of the money demand function for the central bankers.

Nominal Wage Rigidities and the Propagation of Monetary Disturbances

Recent research has challenged the ability of sticky price general equilibrium models to generate a contract multiplier, i.e., an effect of a monetary innovation on output that extends beyond the contract interval. We show that a simple dynamic general equilbrium model that includes Taylor-style (1980) wage and price contracts can account for a substantial contract multiplier under various assumptions about the structure of the capital market. Most interestingly, our results do not rely on a high intertemporal labor supply elasticity or elastic supply of capital: our preference specification is standard (logarithmic), and we can account for a strong contract multiplier even when the aggregate stock of capital is fixed. Finally, our analysis highlights the importance of the income elasticity of money demand in accounting for output persistence.