DETERMINANTS OF THE UNITED STATES CURRENCY-DEMAND DEPOSIT RATIO.

Over the past decade a substantial amount of literature has evolved pertaining to the determinants of the money stock. It is widely recognized that the money stock is jointly determined by the action of the monetary institutions, through their control of the ratio of reserves to deposits and the monetary base, and the nonbanking sectors, through the public's desired proportions of currency and deposits. While the monetary authority's ability to control the reserve ratio, monetary base, and as such, the money supply has been hotly debated, relatively few economists have given explicit, formal attention to the currency ratio over time. Furthermore, economists such as Boris Pesek (1970), James Tobin (1963), and Allen Meltzer (1969) have stated that those studies of the currency ratio that do exist are basically of a verbal and ex post speculative nature. Lack of knowledge of the determinants of the currency ratio remains one of the large gaps in our understanding. This paper presents a theoretical and statistical analysis of the determinants of the currency-demand deposit ratio for the United States. Unlike previous studies of the demand for currency relative to demand deposits, this study takes explicit account of a positive rate of return on demand deposits as well as the interrelation between currency, demand deposits, time deposits and other market securities. Section I is devoted to a comparative static analysis which shows the currency ratio to be positively related to the time deposit rate of return, a market security rate of return, the rate of savings relative to expenditures, and a transaction variable. The currency ratio is shown to be negatively related to the net rate of return on demand deposits. In Section II, real world proxy variables are presented and contemporaneous as well as distributed lag, single equation regression models are appraised for assessing the strength of the above currency-demand deposit ratio effects. [ABSTRACT FROM AUTHOR]