INFLATION, HEDGING AND THE DEMAND FOR MONEY: SOME EMPIRICAL EVIDENCE

This paper explores the role of nominal rate of return uncertainty and inflation hedging as potentially important factors explaining the pattern of money demand. Using U.S. quarterly data over the period 1952.2–1982.4, it is shown that in conformity with theoretical considerations the nominal rate of return uncertainty variable tends to have a significantly positive effect and the inflation hedging variable (the covariance between nominal rate of return and inflation rate) a significantly negative effect on the demand for money. These findings seem to be reasonably robust in terms of various definitions of income, interest rates, inflation rate and money variables as well as in terms of different estimation methods.     

THE INTEREST ELASTICITY OF MONEY DEMAND, LIQUIDITY AND REVERSE CAUSATION

This paper employs theoretical neoclassical and Keynesian models which have been expanded to include near monies to demonstrate that the interest elasticity of money demand is a peripheral issue to more fundamental differences between monetarists and Keynesians. The analysis indicates that the money supply is endogenously determined by income in such models, i.e. the reverse causation argument applies, and money is therefore an inappropriate instrument of monetary policy. The analysis also reveals that necessary and sufficient conditions for fiscal policy to be impotent are that the interest elasticities of money demand, money supply and all near monies must be zero.     

THE SWINGS OF U.S. INFLATION AND THE GIBSON PARADOX

In recent business cycles, U.S. inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate (Gibson paradox). We examine these facts in an estimated dynamic stochastic general equilibrium model with money. Our findings point at a flatter New Keynesian Phillips Curve (higher price stickiness) and a lower persistence of markup shocks as the main explanatory factors. In addition, a higher interest‐rate elasticity of money demand, an increasing role of demand‐side shocks, and a less systematic behavior of Fed's monetary policy also account for the recent patterns of U.S. inflation dynamics. (JEL E32, E47)     

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.      

MODELING MONETARY TRENDS IN ITALY USING HISTORICAL DATA: THE DEMAND FOR BROAD MONEY 1861—1990

In this paper we estimate a stable demand for money relationship for Italy using a long series of historical data. We extend previously available data sets to obtain a sample for the years 1861 to 1990 and use cointegration analysis and two-stage estimation procedures to obtain a dynamic model for M2 demand. By employing a small number of explanatory variables and a nonlinear error-correction model we find a stable demand for money relationship. Our model incorporates significant inflation and interest rate effects, in contrast to previous studies of this type.     

CROSS-COUNTRY ESTIMATES OF THE DEMAND FOR MONEY AND ITS COMPONENTS

The demand for money aggregates (M1, M2) and their components (currency, demand deposits, and time deposits) are estimated using a sample of 103 countries at two time periods. Money demand is found to be affected by age, literacy, industrial development, and political structure, as well as income and inflation. This expanded demand function helps to explain the considerable changes in money demand that have occurred over long periods and the large variation in money demand found across countries. The knowledge thus gained is useful for understanding differences in monetary and taxation policies across countries.     

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)     

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.      

MONEY DEMAND DURING HYPERINFLATION AND STABILIZATION: BOLIVIA, 1980–1988

This paper examines the demand for money in Bolivia during the 1980s, a decade of extreme instability with annual inflation rates reaching over 20,000 percent, and a subsequent stabilization, with annual rates falling to less than 25 percent and remaining so for more than five years.
Our empirical analysis makes use of error-correction approaches, time-varying-parameter estimation with Kalman filtering, and GARCH models of expected inflation and inflation variance. We find that expected inflation and inflation uncertainty both matter for money demand. Time-varying estimates show that the reaction to monetary disequilibria was significantly faster during hyperinflation.     

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.     

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.     

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.     

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)     

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.     

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)     

A CLARIFICATION OF THE EXCESS DEMAND FOR OR EXCESS SUPPLY OF MONEY

One of the most misunderstood and neglected concepts in all of economics is the notion that money may be in excess supply or excess demand. The article presents several reasons why monetary disequilibrium would indeed persist, including the fact that no "money market" exists with a single price which would clear that market. Contrary to the claims of several leading textbooks, the article explains why changes in the interest rate would not immediately eliminate an excess supply of or demand for money.     

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.     

ESTIMATING THE LIQUIDITY OF M2 COMPONENTS IN THE POST-DIDMCA ERA

This paper estimates the liquidity of M2 components within an intertemporal model of a representative household. A modification of Pfann and Verspagen's asymmetric adjustment cost function measures liquidity cost. Generalized Method of Moments estimation of structural parameters using monthly data for December 1983–March 1993 reveals significant evidence of asymmetry toward decreasing asset holdings for all components except demand deposits. Estimated withdrawal costs for savings deposits, money market mutual funds, and small time deposits are small. Split sample estimations suggest greater liquidity in the more recent period. The results point to the effects of financial innovation in lowering withdrawal costs. (JEL E51, D91)     

The appropriate specification of constant elasticity demand functions

Constant elasticity demand functions for individuals must be of unitary elasticity if the integrability conditions arising from the Slutsky matrix are to be preserved. This result imposes constraints on the estimation of demand systems for individuals for whom constant elasticity specifications are assumed. In particular, this result has implications for the use of constant elasticity specifications in the median voter approach to estimating the demand for local public services.The authors thank Arthur Denzau, Marvin Kraus, Jorge Martinez and an anomymous referee for helpful comments. An earlier version of this paper was presented at the Public Choice Society Meetings, Savannah, March, 1983     

SOME ECONOMIC CONSEQUENCES OF ANTICIPATING TECHNICAL ADVANCE

Using a simple model of a long run profit maximizing firm, we investigated the consequences of foreseeing future technical advance upon the adoption of new technology, scrapping of old, and for price and output of the firm's product. To simplify the analysis and highlight the conclusions, we assumed all technologies embodied in equipment and all equipment infinitely durable. It was shown that the often-used formulas for the unit cost of using capital over a finite (rkj/(l — a^T)) or infinite (rkj) life are appropriate only if the equipment does not become outmoded during its economic life and if there are no demand shifts in that time interval. Otherwise, the current cost of using capital (ex ante) must reflect future lesser or greater earning power of that capital due to outmodedness or demand shifts. Anticipation of technical advance tends to delay scrapping of old equipment and retard installation of new, with current output smaller and price higher than if technology is stagnant. Selection among currently competing technologies is also affected by the course future technical advance is expected to follow. The economic lifetime of capital equipment is independent of the elasticity of demand for the firm's output. On the other hand anticipation of demand expansion tends to partially or wholly offset the effect of anticipating future technical advance, while expected demand decline tends to reinforce it. Uncertainty about when improved technology will appear tends to retard adoption of current best practice technology, to retard scrapping of outmoded technology, restrict output and elevate price, in comparison with pptimal policy when the time of availability is believed known. The optimal policy is unaffected when it is the magnitude of the improvement rather than its timing which is unknown.