Cointegration and Structural Change: An Application to the U.S. Demand for Money

I perform the cointegration tests for the trivariate model of real monetary aggregates, real personal income, and short‐term interest rate. I find the existence of a long‐run relationship among these three variables. To check the stability of a long‐run money demand relationship, I implement a rank constancy test and CUSUM test. The test results show that real M1 is relatively more stable than other aggregates, but structural change occurred during the 1970s and early 1980s. This is consistent with prior research on money demand.     

GOVERNMENT DEBT AND THE DEMAND FOR MONEY: AN EXTREME BOUND ANALYSIS

The article provides evidence that there is a relationship between government debt and interest rates via the demand for money. This relationship is examined through the wealth effect of government debt on money demand, and the robustness of the results is tested by the use of extreme bound analysis in addition to standard econometric techniques. We find that OLS regression shows government debt fnfecting the demand for money positively, implying that Federal government debt is net wealth. In addition, the extreme bound analysis shows that the estimates of the government debt coefficient are robust under alternative specifications of the Goldfeld model.     

Estimates of Money Demand Functions for Estonia

This paper examines the money demand function of Estonia in the period 1995–2006. Since Estonia has a currency board system, euro area interest rates are taken into account. We apply different cointegration procedures like the Engle–Granger, the dynamic OLS, and the Johansen procedure to estimate the long-run relationship among money, output, and interest rates. The results show that it is difficult to find a cointegrating relationship for the broad money aggregate M2. For the preferred relationship including euro area money market rate and euro area bond rate a dynamic equation is estimated. This dynamic equation is stable for the whole period. The change of the anchor curreny in the currency board and the accession to the European Union do not alter the relationship.      

Buying a Dream: Alternative Models of Demand for Lotto

Existing lotto demand models utilize effective price, computed as the face value of a ticket minus the expected value of prize money per ticket, as their primary explanatory variable. By contrast, this article proposes a key role for consumption benefit or "fun" in the demand for gambling in general and lotto demand in particular. It develops an alternative model of lotto demand that focuses on the maximum possible prize. When this is tested against the traditional model using data from the U.K. National Lottery, we find that jackpot considerations exert an influence over and above that of variations in effective price.     

REAL VERSUS NOMINAL SPECIFICATION OF THE DEMAND FOR MONEY FUNCTION

This paper re-examines the issue of real versus nominal specification of the money demand function and presents evidence in favor of the nominal specification. A series of experiments with U.S. quarterly data show that the money demand function specified in nominal terms is more stable and generates more accurate forecasts than that specified in real terms. "The case of the missing money" also is discussed.     

NOMINAL COSTS AND THE DEMAND FOR REAL TRANSACTIONS BALANCES

The standard specification of constant real transactions costs assumes that over the sample period transactions costs move in lock-step with the GNP deflator; our model assumes that transactions costs move negligibly compared to the GNP deflator. That is, nominal transactions costs are assumed constant here rather than real transactions costs as in other estimates of money demand. We find with this nominal-transactions-cost specification that the real money demand function is more stable in terms of the stability of the coefficients and the accuracy of out of sample predictions than indicated by earlier studies.     

IS THE PRICE ELASTICITY OF MONEY DEMAND ALWAYS UNITY?

Including both monetary gold and nonmonetary gold in a standard money‐in‐utility model, we establish a presumption that the price elasticity of money demand should be less than 1 under commodity standards. Applying cointegration methods to data of the world, the United Kingdom, and the United States, we find support for the new theory. (JEL E41, E42)     

A CLOSER LOOK AT LONG‐RUN U.S. MONEY DEMAND: LINEAR OR NONLINEAR ERROR‐CORRECTION WITH M0, M1, OR M2?

We study annual U.S. data from 1869 or 1900 to 1999. We find evidence for a well-specified and stable model of money demand with data from 1946 to 1999. We carry out diagnostic and stability tests, including linearity tests. A linear error-correction model with the monetary base performs better than a model with M1. A specification with M2 is not supported. We use real gross national product as the scale variable and a short-term interest rate as the opportunity cost measure. We estimate an income elasticity of 0.86 and an interest rate elasticity of −0.44 for the monetary base . ( JEL E41)     

INTERNATIONAL PRICE BEHAVIOR AND THE DEMAND FOR MONEY

Oil prices, commodity prices and American monetary policy, the last operating through a variety of channels, have all figured prominently in explanations of the international inflation process in the late 1960s and early 70s. OUT major purpose in this paper is to test these various hypotheses. We do so in the context of a reduced-form rational-expectations price equation which we estimate for the United States and seven other industrial countries using quarterly data for the period 1955 through 1976.
The principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process. The factors that produced these monetary changes, however, differed among countries. Price shocks of various sorts were clearly of secondary importance.
The other important set of conclusions concerns the demand for money. In place of a traditional stock adjustment model, we used GLS with a second-order correction for autocorrelation. We believe this produced more plausible estimates of the parameters of the long-run demand function and of the adjustment process itself.     

MONEY DEMAND AND QUANTITY CONSTRAINTS: EVIDENCE FROM THE SOVIET INTERVIEW PROJECT

This paper examines the effects of shortages on the demand for money of Soviet citizens. It is the first to examine the demand for money in a centrally planned economy using cross-section data in which alternatives to income and interest rates are used to explain money demand. We find demand for broad money and liquid assets depends on income, illiquid wealth, participation in the underground economy, and the severity of quantity constraints as well as demographic factors. Our findings show that quantity constraints decrease demand for the national currency and increase demand for convertible currencies and barter transactions.     

Roles of Stock Price and Exchange Rate in Slovakia's Money Demand Function and Policy Implications

The demand for real M1 in Slovakia is positively influenced by real output and the stock price and negatively associated with the deposit rate, depreciation of the koruna, the euro interest rate, and the expected inflation rate. Considering the goods and the money market simultaneously, these results suggest that a higher stock price may or may not cause real output to rise and that a depreciation of the koruna or a higher euro interest rate would help raise Slovakia's real output. The coefficients of the deposit rate and the stock price in real M2 demand are insignificant at the 10% level. The likelihood ratio test in the extended Box–Cox model shows that the double-log form cannot be rejected at the 5% level while the linear form can be rejected at the 5% level. The CUSUM and CUSUMSQ tests show that the money demand function was relatively stable.      

COSTLY PORTFOLIO ADJUSTMENT AND THE SHORT RUN DEMAND FOR MONEY

In many empirical studies the short-run demand for money includes a lagged dependent variable; this is usually attributed to some cost of adjusting money balances toward their desired level. This short-run money-demand equation is sometimes used as a structural equation in models in which market clearing is also assumed (in the sense that money supply equals short–run money demand). In this paper, a theoretical counterexample demonstrates that this use of a short-run money demand equation is not generally valid. This finding challenges the usual interpretation of the lagged dependent variable.     

THE DEMAND FOR EXCESS RESERVES, LIABILITY MANAGEMENT, AND THE MONEY SUPPLY PROCESS

Commercial bank behavior is not adequately dealt with in existing macro models of the financial sector. The central role of a demand for excess reserves (or free reserves) function in models of the money supply process is particularly suspect. In this paper, it is argued that changes in commercial bank behavior induced by alterations in economic and financial conditions and various banking regulations, along with the central bank's approach to policy, have combined to alter the excess reserve function and the relationship between bank reserves and the money supply. Empirical work presented suggests that the "demand" for excess reserves has indeed undergone structural change. Thus, the study indicates that conventional approaches to commercial bank behavior and the demand for excess reserves need to be reworked.     

OPTIMAL MONETARY POLICY AND IMPERFECT FINANCIAL MARKETS: A CASE FOR NEGATIVE NOMINAL INTEREST RATES?

This article studies optimal monetary policy in a model with credit frictions and money demand. We show that augmenting a standard New Keynesian model with money demand and financial frictions generates a mechanism that, in equilibrium, gives rise to optimal negative nominal interest rates. In addition, we find that the tighter credit markets are, the lower the optimal nominal policy interest rate and the more likely it is to be negative. Quantitatively, when credit constraints are binding, a standard calibration of the model generates an optimal nominal policy interest rate that is roughly ?4% annually. (JEL E31, E41, E43, E44, E52, E58)     

MONEY SUPPLY VARIABILITY IN A MACRO MODEL OF MONOPOLISTIC COMPETITION

The effects of changes in money supply variability are examined for a macro model of monopolistic competition. Increases in money supply variability raise demand uncertainty causing individual firms to produce more for inventory. In addition, expected profits decrease, inducing a number of firms to leave the economy. Aggregate income then falls in spite of an increase in firm-level production. The result on aggregate income is standard, but the results on inventories and the number of firms in the economy distinguish this monopolistic macro model empirically from conventional macro models when changes in money supply variability occur.     

The value of planned death

In this paper we propose a theoretical model of evaluating the economic costs and benefits of physician assisted suicide (euthanasia). The contemplation of euthanasia is modeled akin to the valuation of a real option. Our modeling of the decision shows that euthanasia is optimal when certain conditions are satisfied. The findings in this paper suggest that if more money is spent on medical research (such as pain management), the demand for Euthanasia could be reduced.     

Profiling Donors of Blood,Money, and Time

Understanding donor profiles is crucial for donor relationship management. Whereas previous research has focused on profiling blood, money, or time donor segments separately, we define seven donor profiles based on their former donation behavior for blood, money, and time donation and compare them to non‐donors. Relying on representative data from the German Socio Economic Panel, we use an extensive set of characteristics that include sociodemographic, psychographic, health‐related, and geographical measures and simultaneously investigate profiles of donors for single and multiple donation forms and non‐donors by means of a multinomial logistic model. Our results reveal valuable insights for donor acquisition and retention strategies of nonprofit organizations along the identified profiling characteristics of donor segments. By this, our findings help nonprofit organization managers to better target single and multiple donors across three donation forms.     

The Role of Money Arguments in Marriage

Despite the paucity of empirical evidence indicating the impact of money arguments on spousal relationship outcomes, it is common belief that money plays a large role in the life of couples. This study used panel data from the 1979 National Longitudinal Study of Youth to examine how money-related arguments affect the marital relationship. Economic theory indicates that initial expectations about the marriage and variance in expectations are both important in predicting relationship satisfaction and divorce. Money arguments were modeled as a sign of the lack of investment in spousal-specific capital and were hypothesized to negatively impact relationship quality. Results suggest that money arguments are an important indicator of relationship satisfaction, but are not as influential in predicting divorce. Both the approach used to model money arguments and the empirical results can be used by marriage therapists and financial counselors to help couples understand and improve the benefits received through marriage.     

Exogeneity within the M2 Demand Function: Evidence from a Large Macroeconomic System

A large body of literature investigates whether a stable and predictable long-run association between money and its arguments exists. One point of variation between models is whether to include an interest rate measure directly within the long-run relationship. Several recent studies indicate that empirical findings are sensitive to the choice. Therefore, the present article reexamines the empirical significance of the interest rate within a four-equation macroeconomic system. The results suggest that the interest rate (1) may be excluded from the M2 demand function, (2) is strongly exogenous to most of the system's remaining variables, and (3) may represent a common trend.     

The time-varying performance of the long-run demand for money in the United States

This article investigates the issues of the stability and predictability and interest-sensitivity of money demand over 1870–1997. Two different estimation methodologies are used - random coefficient (RC) modeling and vector error correction (VEC) modeling. The former procedure allows the profiles of the coefficients to be traced over time and relaxes several restrictions routinely imposed in applied work. The results indicate that different estimation methodologies using different data periods and frequencies yield estimates of some of the coefficients of the long-run demand for money that fall within a fairly narrow range. The results also suggest that specification errors have had an important influence on the time profile of the interest elasticity of money demand and that there is a tendency for the interest elasticity to decline in absolute value as interest rates decline.