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Abstract In this paper, I examine the stability of the long-run relationship between real money demand, income, and interest rates in Senegal. Using advances in unit root and co-integration, T [...]

Several theoretical models of money demand imply nonlinear functional forms for the aggregate demand for money, characterized by smooth adjustment toward long-run equilibrium. In this paper, we propose a nonlinear equilibrium correction model of U.S. money demand that is shown to be stable over the sample period from 1869 to 1997., OVER THE last decade or so, a large body of empirical research on modeling the demand for money has developed, mainly using cointegration and equilibrium correction techniques (see, inter alia, [...]

The traditional stability tests performed on the models of US M1 demand when repeated over time lead to improper rejection of stability. The error-correction models 1948-1981 indicate that stability cannot be rejected. The agenda of challenges for empirical model specification can help remove apparent instabilities.

Byline: Stephen Dobson (1), Carlyn Ramlogan (2) Keywords: Caribbean; cointegration; demand for money; economic liberalization Abstract: Economic liberalization creates potential instability in money demand. The introduction of liberalization in the early 1990s coincided with instability in the long-run demand for broad money (M2). OLS estimates confirm the presence of a structural break in the M2 model. Monetary policy should be based on a narrow definition of money. Moreover, the demand for money function must take explicit account of the openness of the economy. The results have important implications for policymakers in other Caribbean countries that are contemplating economic liberalization. Author Affiliation: (1) School of Management and Economics, The Queen's University of Belfast, Belfast, BT7 1NN, UK (2) Department of Agricultural and Food Economics, The Queen's University of Belfast, Belfast, BT7 1NN, UK Article History: Registration Date: 01/10/2004

It is clear that the reflux mechanism should be taken seriously as a mechanism for reconciling the demand for deposits with the credit-led supply. The reflux mechanism works, but there is still the empirical question as to how much of any new borrowing is moderated straight away by being received by depositors with overdrafts, and how much will be involved in further circuits. It is important to avoid the naive use of the reflux mechanism to suggest that ex ante discrepancies in loan and deposit demand can never have any impact on other variables.

1. Introduction Since the 1970s, the persistently high unemployment rates in many industrial economies have made more and more economists believe that involuntary unemployment is one of the major stylized [...]

Byline: Katrin Wesche (1) Keywords: demand for money; European Monetary Union; cointegration Abstract: The paper assesses the stability and predictive performance of a European money demand function as compared to national money demand functions. With respect to the explanatory accuracy, the national functions perform better than the aggregated function. Examination of the residuals of the national money demand equations indicates that currency substitution is not the major cause for the stability of the aggregated money demand function. The aggregate relation mainly seems to reflect German money demand. This conclusion is supported by the instability of aggregated money demand resulting from the exclusion of Germany from the aggregate. Author Affiliation: (1) University of Bonn, Institut fur Internationale Wirtschaftspolitik, Lennestr. 37, D-53113, Bonn Article History: Registration Date: 29/09/2004

A cash-in-advance model of currency substitution in was created to evaluate the observed occurrences concerned with money demand and inflationary finance. The proposed model suggests that money velocity exhibits hysteresis in the fact that a momentary increase in expected inflation can result in a lasting increase in velocity. Smaller fluctuations in expected inflation have also been seen to have more lasting effects on money velocity in dollarized economies.

Byline: Frank A.G. Den Butter (1,2), Simon Van Dijken (1) Keywords: money demand; EMU; aggregation; combining information Abstract: Estimates of aggregated and disaggregated demand-for-money functions in 7 EMU member states show that the aggregated function slightly outperforms the disaggregated functions in explaining the European demand for M3. The aggregated function appears to contain some additional information on money demand in The Netherlands and, to a lesser extent, in France. For the other countries investigated in this study information on aggregated European money demand does not add much to the explanation of demand for money in the individual countries. Author Affiliation: (1) Vrije Universiteit, Amsterdam, The Netherlands (2) Tinbergen Institute, The Netherlands Article History: Registration Date: 29/09/2004

Direct effects of inflation uncertainty in Greece between 1975 to 1993 has been assessed through the use of an Autogressive Conditional Heteroskedasticity (ARCH), a cointegration process. The analysis has revealed that financial volatility, has indeed, affected the money demand equation in Greece. Through the use of the ARCH process, it was determined that the increase in inflation uncertainty brought about by monetary deregulation can be attributed to some factors such as currency fluctuations and incompetence of financial policymakers. The deregulatory process also contributed to the changes in velocity movements.

The objective of this paper is first to derive theoretically and then test empirically for the existence of differential propensities to demand for money across sectors by industry of origin in a developing economy. The econometric evidence for the Indian economy on the agriculture (commodity) and non-agriculture (services) sectors for a little over a four decade period is convincing. The presence of sectoral bias in the money demand function is clearly indicated for India over the period 1950/51-1991/92 implying thereby that monetary planning based on the standard macro-money demand specifications for India may produce misleading results.

Varian's nonparametric technique is employed to find out if different subgroupings of monetary assets are weakly separable in a completely specified utility function and in the consumer's utility function. Findings of this study strongly prove that traditional money demand studies may be misinformed in ignoring the role of relative prices. This misspecification could be partially credited for the general money demand instability seen in official monetary aggregates in the UK since the 1970s.

A procedure for solving the problem of estimating the distribution of the number of controls of the state variable, or monetary transactions within a certain time period, in trigger-target or Baumol-Tobin models of money demand is introduced. The problem, which is otherwise known as the cash management problem, is illustrated via the investment decision of an electric utility faced with stochastically increasing demand.

This paper examines the relative demands for domestic and foreign currency deposits by residents of developing countries. A dynamic currency substitution model that incorporates forward-looking rational expectations is specified and estimated for a group of ten developing countries. The results indicate that the foreign rate of interest and the expected rate of depreciation of the parallel market exchange rate are important factors in the choice between holding domestic money or foreign currency deposits abroad. Furthermore, the model appears to fit the data better than a conventional partial-adjustment model. JEL classification: E41; F32; C52 Keywords: Currency substitution; Money demand; Forward-looking expectations

Sectoral money demand Junctions are estimated using flow of funds data. Cointegrating relationships are found for household and (nonfinancial) business sectors. Estimated error-correction models for both sectors, however, exhibit parameter [...]

The impact of the Germany monetary union on the stability of the narrow money demand and aggregate demand for money is studied. Two large European currency areas were involved in the study of aggregate demand for money. Empirical analysis shows that there is a close relationship between real money, output and the interest rate. Narrow money remains as a possible indicator in the European Monetary Union.

The validity of the Bewley-type model (1983) is proven. The model, which looks at money as a tool to counter 'uninsurable idiosyncratic income fluctuations,' contradicts the traditional optimum quantity of money theory and shows that it is impossible to fully satisfy monetary demand. To support its premise, an example concerning the application of classic optimum quantity of money proposal is given. It highlights the effect of a negative distribution effect during the computation of the optimal interest rate.

I. Introduction Open economy models which make a distinction between traded and non-traded goods have been widely used to analyze a variety of issues. For simplicity, in many cases the [...]

The impact of the International Gold Standard on the money supply and inflation rate in 12 European countries is investigated via correlation and cointegration techniques. Both tests reveal a trend toward lower price levels and higher integration of inflation. These are not supported by data and it is surmised that the discrepancy may be due to the countries' machinations to 'circumvent the system' and to fluctuations in the money demand among the 12 countries.

A study was conducted to determine whether a stationary long-run money demand function exists in Argentina, Mexico and Israel, which have high inflation. The aim was to determine the validity of the assumption in studies of the money demand function that a long-run equilibrium between real money balances, real income and the opportunity cost of holding real money balances exists. Tests using the Johansen method of cointegration showed that there exists a stationary long-run money demand function in all three countries. This is true only if currency depreciation is included in the money demand function.

Traditional macroeconomic models point to the relationship among demand for money balances, aggregate income and the opportunity cost of holding money balances. However, it was only until recently that techniques for accomodating nonstationary data in money demand functions have been used by researchers. The long-run money demand function for Morocco is estimated by using the econometrics of nonstationarities.

The demand-for-Money function is one of the central behavioral relationships in macroeconomic models. Its stability and simplicity was at the center of claims by monetarists that monetary targeting should be [...]

A general equilibrium model, wherein buyers and sellers find it more and more difficult to conduct private credit transactions as economic activity penetrates new markets is presented. In the model, the demand for money grows as the production and trade frameworks become more complicated. In the context of the model, however, financial innovations permit agents to economize on cash balances. These impact of technological advancements explain two regularities. These are the U-shaped trend in velocity and the ever-increasing amount of productive resources allocated to the private sector.

This paper is an empirical study of the demand for money in Taiwan, a small open economy. Alternative hypotheses of the short-term adjustment process are tested, and the results support the error-correction adjustment process. The results further suggest, based on a battery of tests, that the estimated error-correction money demand equation is temporally stable. Focus is also given to the open-economy nature of the money demand model, and the results indicate that some measure of foreign interest rates plays a significant role in Taiwan money demand behavior. Monetary policy in Taiwan, therefore, must take into account the response of domestic money demand to changes in such factors., 1. Introduction The demand for money has probably been studied more intensively than the demand for any other asset--real or financial. This interest in the demand for money is because [...]

An elasticity of substitution is estimated using a user-cost-dependent direct utility function in order to measure the substitutability between monetary assets. Such estimates of the monetary asset substitutability are crucial in deriving a stable money demand function, which, in turn, is important in the theory and application of monetary policy. Findings show low substitutability among all monetary assets included in monetary aggregates M1 and M2, thus indicating that monetary policy may have its strongest initial effect on the real sector through affecting thrift intermediation.

The Baba, Hendry and Starr (BHS) equation of the demand for money in the US has been a success compared to other researches on US money demand because it has shown stability and goodness of fit over the period 1970s and 1980s. However, its economic properties cannot be drawn conclusively. The BHS claim for superior performance due to its inclusion of financial innovations in its model is overstated; its success is more attributable to its dynamism. The BHS model can easily generate estimates that closely match statistics having different implications.

A study was conducted to evaluate research on the economic features of the German monetary union. Earlier research has shown that Bundesbank has applied a policy on price stability while conducting a process of money targeting. Despite deviations from monetary goals, German authorities often follow a non-inflationary policy. However, such research conclusions failed to substantiate the use of domestic aggregate demand as a scale factor.

My comments on this paper about monetary policy in Germany in the aftermath of the Germany Monetary Union (GMU) will be concentrated on two aspects: (i) on the characterization of the Bundesbank's policy regime and the interpretation of the equilibrium price level, (ii) on the unification effects in the German money markets., A study was conducted to evaluate research on the economic features of the German monetary union. The study considers a varation of earlier research assumptions on the nature of Bundesbank policy. Output and velocity are assumed to be exogenous random variables in both permanent and transitional states. It is shown that assuming the absence of any impact by money shocks on output and velocity, monetary policy affects only price levels.

We present an empirical analysis of German money demand, money supply, and monetary policy after German monetary union in 1990. Empirical models for velocity and forecast models for the money multiplier are estimated. Stability analysis reveals that structural stability of the demand for broad money after monetary union must be rejected; stability of the demand for narrow money can be accepted. East German portfolio adjustment with regard to the structure of monetary portfolios occurred quite rapidly. The increase in monetary control uncertainty caused by these adjustments did not, however, impede monetary targeting with reasonable precision.

An analysis of the microeconomic foundations for setting trigger-target rules of portfolio demand is presented. The analysis focuses on the cash-in-advance constraint and considers demand for money as an example. It is shown that a cash-in-advance constraint enables an agent to decide the position of fixed transactions cost between money and the interest bearing asset. In addition, such conditions may set suboptimal trigger-target rules.

The application of the Lucas critique as a forward looking buffer stock model for the demand for broad money in the UK is tested. The test of superexogeneity reveals that the Lucas critique is not applicable even to broader monetary aggregates as suggested by some analysts. This was unexpected considering the constancy of the model conditional on observed prices, interest rate and wealth.

FOR MANY YEARS, THE Federal Reserve has focused on the narrow M1 transactions as a guide to policy. Traditionally, the M1 aggregate was regarded as a desirable policy guide because [...]

EVIDENCE OF PERIODS OF INSTABILITY and structural change in the demand for monetary assets has appeared in money demand studies since the early 1970s. The possibility of structural change in [...]

A study was conducted to determine the effect changes in the exchange rate has over money supply. The demand functions - M1 and M2, and other indicators of money supply were subjected to implement tests of cointegration. It was found that changes in the exchange rate affects the M2 variable of money supply. This lends credence to the theory of Ronald McKinnon concerning currency substitution.