Stable Money Demand Function Research Articles

On an Empirical Definition of Money for Pakistan

In the realm of monetary economics, the question of the appropriate definition of money is both crucial and controversial. Various definitions of money offered by monetary economists differ widely. While narrowly defined money consists of currency and demand deposits only. other broader definitions of money include a host of other assets as well. The choice of the most appropriate monetary aggregate is an empirical issue and needs to be settled empirically. In the literature a number of methods are available for defining money empirically. To mention only two of them, Meltzer (1963) and Laidler (1966) consider that definition o f money the most appropriate which gives the most stable demand function for money while Chetty (1969), Moroney and Wilberatte (1976), Boughton (1981) and Husted and Rush (1984) infer their definition of money on the basis of the degree of substitutability between narrowly defined money and other financial assets. Although the two methods are closely linked, the latter has the advantage of providing a direct measure of the degree of substitutability between various financial assets and also allows for defining money as a sort of weighted average of these assets based on this substitutability rather than a simple-sum aggregation.

Instability versus dynamics: A study in West German demand for money

This paper presents an empirical analysis of the demand for money in Germany covering the period of 1964–1984. Money demand is specified in terms of the income velocity of money, and the openness of the German economy is taken into account in the formulation of the basic model. Using quarterly data for both narrow and broad definitions of money stocks, it is shown that the empirical evidence is consistent with the presumption of a fixed coefficient, stable demand for money function in Germany. The instability results of previous studies are likely to stem from the conventional research strategy of straightforwardly estimating a level cumstock adjustment model without taking much care of its adequacy for the relevant data generating processes. In contrast, the research strategy adopted in this paper is to carefully single out an acceptable statistical representation of the data generating process. Tests of economic hypotheses and parameter stability are conducted on the basis of this representation in the second step of our investigation.

Dynamic specification and the demand for money function

This paper investigates the existence of a stable demand for money function in three Asian countries using the error correction methodology proposed by Hendry et al. (1984). Particular attention is paid to the role of both financial and real assets as substitutes for real cash balances.

Monetary Anticipations and the Demand for Money: An Application for the South Asian Region

While there are a number of issues in economics which are frequently scrutinized, the most important of them probably is the determination of a stable money demand function. Other issues in this regard relate to the choice between (i) broad vs. narrow definition of money; (ii) measured vs. permanent income; (iii) short-term vs. long-term interest rate; and (iv) inclusion of a variable for inflation or expected inflation. Quite recently, a new dimension has been added to the demand for money function. It is now argued that unanticipatory changes in the nominal money supply also affect the real demand for money. Darby (1972) has proposed that unanticipatory nominal money supply behaves as a shock-absorber in the money demand function. Initially, Laidler (1980) and then Carr and Darby (1981) formulated a shock-absorber model in which they have shown empirically that unanticipatory shocks in money supply positively affect the demand for money. Inclusion of this shock variable was justified by Darby (1972) on the ground that money balances serve as a buffer stock or shock-absorber which temporarily absorbs unexpected variations in income, especially the transitory income, until an adjustment is reached in adjusting the portfolio of securities and in consumer durable goods. The shock absorber model of Carr and Darby is based on the following two hypotheses:

Currency Substitution, the Exchange Rate, and the Real Interest Rate (Non) Differential: Shipping the Bad Money In: Note

lntroduction Much of the research attention devoted to exchange rate determination has had its basis in what has come to be termed the monetary approach to the exchange rate (Frenkel 1976, Bilson 1978). That is, the exchange rate is viewed as the relative price of two monies with its equilibrium value defined to be that which causes the existing stocks of the two monies to be willingly held. These endeavors have in common the notion of a stable money demand function, whereby real money demands are influenced in a systematic and predictable fashion by a relatively few variables. This paper presents a long-term theory of exchange rate determination incorporating currency substitution behavior. This integration is not novel (Calvo and Rodriguez 1977, King, Putnam and Wilford 1978, and Girton and Roper 1981). However, existing integrations incompletely specify the modus operandi of such behavior. In so doing, they obscure the roles played by certain money demand parameters in exchange rate determination. The analysis reexamines the roles played by generally accepted money demand parameters in exchange rate determination under the assumption that a subset of money holders are substituting agents.

Estimating Money Demand Functions

THE QUESTION OF which functional forms of money demand regression equations are useful for empirical work is addressed here. Specifically, it is argued that a functional form that focuses attention on the ability of the growth rate of nominal money to predict the inflation rate is a useful way of summarizing empirical evidence on the existence of a stable money demand function. The results of estimating and simulating this functional form as well as standard functional forms are presented in the final part of this paper. A typical equation expressing the public's demand for real money balances (m) is as follows:

Inflation Expectations and the Demand for Money in Iceland

Inflation and the demand for money in Iceland are reported on in this paper. Various specifications of the money demand relationship are estimated for the period 1952-1979. The estimates indicate that the income elasticity of money demand (M3) is in the neighborhood of 0.5. Measured income rather than permanent income appears to be the appropriate scale variable. The opportunity cost of holding money, represented by expected inflation, has a significant negative impact on the demand for real money balances. I. Introduction For two decades, economists have undertaken to estimate the parameters and test the stability of various formulations of demand for money equations in a large number of empirical studies. The existence of stable demand for money functions has been ascertained for a number of countries, revealing broad similarity in parameter estimates. ' Yet, with a few notable exceptions, the research has been limited to highly industrialized economies in the post-World War II period.2 The empirical support for the modern theory of money demand in Iceland is examined in this paper. Evidence for a stable demand for money function in this micro economy, which contains a rare blend of highly developed and underdeveloped institutions, should elucidate the general validity of current monetary theory. With a population of about a quarter million (229000), the country's financial and money markets are at the embryonic stage. Interest rates are pegged, international capital movements strictly regulated, and the Central Bank does not engage in open market operations. There is heavy dependence on foreign trade, and due to its primary reliance

Some Implications of a Stable Demand for Money Function

Some Implications of a Stable Demand for Money Function

Keynesian and monetarist theories of the monetary transmission process: Doctrinal aspects

This paper investigates the doctrinal link underlying differences between Keynesian and monetarist approaches regarding the transmission mechanism of monetary policy. Consideration of the post- General Theory literature reveals that a key aspect of that link concerns the velocity of circulation of money. The Keynesian emphasis on compartmentalizing the demand for money into active and idle components resulted in a mechanical interpretation of velocity and the associated view that money does not matter. The monetarist tradition illustrates the behavioral perspective adduced to velocity via adaptive price expectations by earlier quantity theorists leading to a capital-theoretic reformulation of the quantity theory in terms of a stable demand function for money.

An Annual Money Demand Function for Pakistan: Some Further Results

The paper highlights the main issues involved in the theoretical and empirical estimation of the money demand function in Pakistan. Much of the recent empirical work on money demand has used income as a scale variable. Our work seeks to assess the relevant importance of the permanent income as an argument of the demand function for money. The results of our estimation indicate that a stable money demand function exists using permanent income.

SAVINGS, REAL BALANCES, INFLATION AND EXPECTATIONS‐FURTHER EMPIRICAL EVIDENCE*

In an earlier paper (Tait and Burnell, 1976), evidence showed that in a period when consumer prices were rising an overwhelming proportion of the sample were aware inflation was happening and expected it to continue in the coming 12 months, at least, at the rate of the previous 12 months. In these conditions, they thought it more important to save (in money and near money assets). Despite their awareness that their savings were falling in value, they still thought it more important to save. They did not try to translate their savings into goods as quickly as possible. Their balances were held mainly in banks. The evidence, therefore, supported the real balance effect and the basic postulate of the quantity theory of money, that there is a tendency toward a stable demand function for money in real terms and that people are prepared to accept the cost, through the rate of idation, of holding these real balances.