Stable Money Demand Function Research Articles

The role and impact of monetary policy in CEFTA countries

An effective monetary policy requires a stable relationship between the money stock and macroeconomic variables such as output, price level, interest rates, and exchange rates. A dynamism of structural changes in transition economies of eastern Europe makes such stability far from obvious. This is reflected in the fact that a stable demand for money function cannot be estimated even for the most advanced East European countries: Poland, Hungary, and the Czech Republic. Empirical analysis of the relationship between nominal variables indicates rather limited relationships as well. Therefore, all that can be expected from monetary policy in eastern Europe is not to be too tight so as to starve the economy of needed liquidity and not to be too loose so as to ignite inflation.

A Cointegration Analysis of Broad Money Demand in Cameroon

This paper applies cointegration analysis and error-correction modeling to investigate the behavior of broad money demand in Cameroon over 1963/64-1993/94. The cointegrated VAR analysis first describes an open-economy model of money, prices, income, and a vector of rates of return, within which three steady state relations are identified: a stable money demand function, an excess aggregate demand relationship, and the uncovered interest rate relation under fixed exchange rates and perfect capital mobility. Empirical support is thereafter provided for both PPP and the international Fisher parity between Cameroon and France, and the stability of the short-run dynamics of the broad money demand function is confirmed.

Economic reform and the stability of the demand for money in Tanzania

This paper investigates whether there exists a stationary long-run equilibrium relationship between real money balances, real income, inflation and expected depreciation in Tanzania which can be identified as a money demand function. As the institutional and regulatory framework in Tanzania has undergone a series of changes since economic reforms began in the mid-1980s, shifts in parameters over time might have occurred, causing instability in the money demand function. Using Johansen's maximum likelihood and dynamic modelling procedure, the paper finds equilibrium in the long run and a stable money demand function. These findings imply that, even though economic liberalization and relaxation of controls could have induced instability in the money demand function as conjectured in the literature, such instability was not significant enough to inhibit the estimation of short- and long-run demand for money. Copyright 1999 by Oxford University Press.

Estimating A European Demand For Money

European Monetary Union will come into existence in 1999. This raises questions related to the monetary policy targets that will be adopted by the European Central Bank (ECB). For both likely candidates, targeting a money aggregate or an inflation target, the existence of a stable money demand function at a European level is important. In this paper estimates of such a European money demand for narrow and broad money for the actual 11 EMU countries based on quarterly aggregate data from 1964 to 1994 are presented. It is argued that statistically satisfactory and economically interpretable functions can be found. Moreover, the estimated models appear to be stable over a period of 20 quarters. This raises the hopes that the ECB will face a stable money demand and be able—at least for a certain time—to use past aggregate data for policy purposes.

Money demand and monetary policy in Europe

Money Demand and Monetary Policy in Europe.—The European Central Bank will soon have to decide on her monetary strategy. This paper discusses properties of money demand functions and implications for monetary policy in a monetary targeting regime. Special attention is paid to different concepts of stability of money demand, to the length and variability of adjustment lags, and to the controllability of the money stock. At the European level, stable money demand functions are identified for M1 and M3. However, M3 appears to be less controllable than M1. Long and variable adjustment lags in the demand for M3 weaken the case for broad money as a monetary target. JEL no. E41, E52

The long-run demand for currency and broad money in Italy, 1861–1980*

This letter presents estimates of a stable long-run money demand function in Italy over the period 1861–1980. Results using the Johansen procedure of cointegration indicate a unique, long-run demand function for currency and the broad money supply. In each case, the real income and interest rate elasticities accord reasonably well with expectations from monetary theory in terms of size and sign and are in line with results reported in several studies for the United States and the United Kingdom. It appears that both currency and the money supply broadly defined are suitable aggregates with which to consider the long-run economic impacts of changes in monetary policy in Italy.

Microfoundations for a Stable Demand for Money Function

Scientific revolutions seldom occur when the prevailing theories appear to be performing well: it is only when the accepted theory fails to offer a satisfactory explanation of events that new and more robust theories are proposed. Of these new theories the one which can explain the successful performance of the previous theory and also the events which led to its demise becomes the replacement. So it is in the history of modern monetary economics. The failure of the partial adjustment model in the mid-I970s is well documented in the United Kingdom and the United States and the search for a replacement has been the main point on the agenda since that time. There are many contending theories, some of which are advocated by the other contributors to this controversy, but the mark of a truly better theory which can be claimed to supersede the partial adjustment model is one that can explain the success and the breakdown of the previous theory as well as the events subsequently. Central to the argument of this paper is the importance of individual behaviour in the context of a market for monetary assets. Only by means of careful investigation of the microeconomic behaviour underpinning monetary economics at the individual and the market level can the stability of the money demand function be restored. It is the purpose of this paper to suggest that the buffer stock approach has gone further than other approaches in dealing with the fundamental micro-foundations of the demand for money. It does not suggest that other approaches have no microfoundations but they tend to concentrate exclusively on specific aspects of the micro-structure such as separability and ignore others relating to the behaviour of individual optimisers in a monetary market. The buffer stock model has firm micro-foundations which can explain the events both before and after the breakdown of the partial adjustment model. Section I provides an historical background to the debate and Section II gives a brief overview of buffer stock models which shows that, unlike other approaches, they have been able to reconcile the past success of the partial adjustment model with its present failure: The nature of the microfoundations of buffer stock models are the source of the success and are discussed in more detail in Section III. The final section evaluates the buffer stock approach in the light of the other alternatives.

Microfoundations for a Stable Demand for Money Function

Microfoundations for a Stable Demand for Money Function

Financial innovations and the interest elasticity of money demand: Evidence from an error correction model

The difficulty of estimating a stable money demand function has been blamed on financial innovations of the past two decades. Gurley and Shaw's [1960] thesis implies that a proliferation of money-like assets resulting from financial innovations increased the interest elasticity of money demand. However, Hafer and Hein [1984] provided empirical evidence to the contrary. This paper presents the empirical results of the M2 demand for money using an error correction model for the period 1959:1–87:4 and two subperiods 1959:1–73:4 and 1974:1–87:4. The findings suggest lower interest and price elasticities for money demand in the second sample in which money substitutes proliferated.

Broad Money Demand and Monetary Policy in Tunisia

The development of empirical foundations to the conduct of monetary policy in Tunisia is the central concern of this paper. Finding stable money demand functions, it broadly corroborates the choice of monetary aggregates as intermediate targets of monetary policy by the Tunisian Central Bank. It finds, however, a lower income elasticity than the one currently applied by the Central Bank and proposes a different methodology for defining monetary growth targets. The paper also finds that both interest rates and reserve money are feasible operating targets and suggests that the Central Bank orients its monetary policy more towards transparent operating targets.

Broad Money Demand and Monetary Policy in Tunisia

The development of empirical foundations to the conduct of monetary policy in Tunisia is the central concern of this paper. Finding stable money demand functions, it broadly corroborates the choice of monetary aggregates as intermediate targets of monetary policy by the Tunisian Central Bank. It finds, however, a lower income elasticity than the one currently applied by the Central Bank and proposes a different methodology for defining monetary growth targets. The paper also finds that both interest rates and reserve money are feasible operating targets and suggests that the Central Bank orients its monetary policy more towards transparent operating targets.

An analysis of repressed inflation in two transition economies

In centrally planned economies, domestic prices do not respond flexibly to market forces, so economic disequilibria - including repressed inflation - persist. The authors assess the extent of repressed inflation in Czechoslovakia, Poland, and Romania between 1980 and 1990. First, they develop a simultaneous equation model, which stipulates that the repressed inflation is caused by the difference in growth rate between households' money holdings and retail sales in the economy. Following are the model's basic assumptions: a stable demand for money function exists where the demand for real quasi-money depends on the level of real income and the expected rate of inflation; inflationary expectations are formed under an adaptive scheme in which expected inflation for the next period depends on the error made in predicting the current period's true inflation; the real stock of quasi-money balances adjusts to the desired level, after a time lag. The authors then derive a reduced-form equation on real quasi-money holdings, and estimate it with quarterly data for Czechoslovakia and Poland, and with annual data for Romania. Based on the estimated equation, they derive the true inflation rate for each economy. Finally, they determine the significance of the repressed inflation in each economy through statistical tests on parameters of the estimated equation. These are the authors' main findings: during 1980-90 in Czechoslovakia, repressed inflation was insignificant, the demand for money was mostly for transaction purposes, and inflationary expectations were almost myopic; in Poland, repressed inflation was significant but decreasing after 1987, and inflationary expectations adjusted fairly rapidly; and in Romania, repressed inflation was serious throughout the period, and inflationary expectations adjusted quite rapidly. This economic model needs to be refined and the data used need to be improved. But the paper's findings are broadly consistent with the results of most other studies.

The Search for a Stable Money Demand Function for Pakistan: An Application of the Method of Cointegration

Despite an impressive number of studies on money demand in Pakistan since the early 1970s, the question of stability of the money demand function did not receive much attention. This paper examines the question of whether there exists a stable money demand function in Pakistan. The novelty of the study comes from the application of the method of cointegration to Pakistani annual data over 1951-91.1 The empirical findings of this study are somewhat different from those of earlier studies on money demand in Pakistan and have monetary policy implications. However, besides some inherent shortcomings of the method of cointegration, one possible weakness of the paper is the use of data which extend over the 1950s and 1960s when Bangladesh was a part of Pakistan. It creates an unavoidable problem of data conformability. It induced me to take the risk of being somewhat complacent about the sample size as I report empirical results for a shorter sample period 1972-91. One consolation is that empirical findings for this sub-sample appear qualitatively better than those obtained for the full sample period.

The Value of Time and Recent U. S. Money Demand Instability

Much controversy has surrounded the U.S. money demand relationship, or more precisely, its stability. This is rather disappointing in light of the central importance of money demand estimates for the formulation and implementation of effective monetary policy and for almost all theories of aggregate economic activity. To date, the vast majority of alternative money demand specifications have generally failed to produce a stable money demand function throughout the 1970s and 1980s.

Modern Monetary Theory: A Critical Survey of Recent Developments.

In the aftermath of the debates between Keynesians and monetarists, this book aims to provide a concise overview of the most recent developments in monetary theory. Professor Visser has written an up-to-date survey which discusses major issues such as crowding out, the new classical macroeconomics, the breakdown of the stable money demand function, buffer stocks and currency substitution. Currency problems in general have come to the fore after the collapse of the Bretton-Woods system. The book addresses topical issues such as Hayek's proposal to denationalize money as well as theoretical issues such as the search for the microfoundations of monetary theory. This is an important, up-to-date survey of recent developments in monetary theory and the economic reasoning which underlies it. The use of mathematics has been kept to a minimum.

The long run money demand function in the united kingdom: Stable or unstable?

This article tests for the stability of the long-run money demand function in the United Kingdom during three different time periods. By means of the Johansen-Juselius method of cointegration, support for a stable money demand function is confirmed for the periods 1921–1988 and 1951–1988.

The search for equilibrium relationships in international finance: the case of the monetary model

This paper considers some of the main long-run equilibrium relationships in international finance. We supplement the Phillips–Perron test, which has a unit root under the null, with the new KPS test statistic which is based on a stationary null and apply them to the various exchange rate fundamentals. The application of the Jøhansen test for multiple cointegrating factors finds evidence of the existence of stable money demand functions in both the USA and UK with relatively short-lived perturbations. However, there appears to be insufficient information in the data to distinguish whether the real exchange rate has a unit root or is persistent and mean reverting. The consequent persistent deviations from purchasing power parity appears the only source of rejection of the equilibrium monetary model.

A Gradual Switching Regression and Its Application to Testing the Stability of Money Demand Functions in U.S., Canada, and Japan

A Gradual Switching Regression and Its Application to Testing the Stability of Money Demand Functions in U.S., Canada, and Japan

Evaluating conflicting stability results in german money demand regressions

In this paper we have tried to find the central assumptions necessary to obtain stable money demand functions for the Federal Republic of Germany. We found the hypothesis about the seasonal process to be such a crucial assumption.

Uncertainty and the Stability of Money Demand Functions for the U.S. Agricultural Sector

Uncertainty and the Stability of Money Demand Functions for the U.S. Agricultural Sector