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.