Missing Money Research Articles

Money demand instability: has it ended?

Some researchers suggest that much of the seeming instability in the post-1973 money demand occurred because of financial innovation and deregulation; money demand was in transition. Further unprecedented declines in the income velocity of circulation during 1985 and 1986 indicate that this hypothesized transition continues. Have the effects of financial innovation and deregulation run their course? Do additional unexpected shifts in velocity loom in the near future? Or has the transition come to a halt? These questions are examined using the methodology of Hafer and Hein (1982) as modified by Miller (1986). No evidence of structural shifts exists beyond 1986; M1 growth may have become a reliable monetary-aggregate target again. Further, the missing money has more than returned; more money is held today than predicted by the pre-1973 money demand function. Since M1 now includes interest-bearing transactions accounts and incorporates a saving motive, the finding is not counterintuitive.

Short-run money demand functions: Estimated speeds of adjustment and serial correlation

Parameter estimates in short-run money demand functions begin to behave badly when the sample includes data before and after say 1973, when the “missing money” becomes important. For example, the estimated speed of adjustment becomes implausibly slow. In such cases, there are often multiple minima in the error sum of squares taken as a function of the autocorrelation parameter ρ. Low ρ's give implausible estimates, larger ρ's more plausible. The ESS should always be searched for such sensitivity. First differencing is not generally a good practice, but is sometimes useful.

A “Pure” long-term interest rate and the demand for money

This article presents the appropriate rate by which to discount a constant, certain, infinite stream of future payments: that is, the yield on a noncallable perpetuity or consol. The American consol series is a daily risk-free “pure” long term interest rate which is undistorted by tax effects, call premiums, and varying duration and reinvestment assumptions. If Hamburger had used the American consol series instead of the U.S. Government Long Term Bond Rate in his money demand function, he would have found more of the “missing money.” His average error (actual minus predicted money demand) as a percentage of actual money demand would have been reduced from 1.43% to 0.93% a 35% error reduction.

Static and dynamic forecasting of short-run demand for money

Previous studies of static and dynamic out-of-sample simulations of the demand for money have indicated a breakdown in the short-run real money balances over the past 1974 forecast period. Using the varying parameter regression technique, the findings of this paper demonstrate that previous results are misleading because the shift of the money demand is obscured by the constant coefficient estimation technique. Our estimation procedure has not only drastically improved both static and dynamic forecasts but has also solved the missing money puzzle.