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Money Demand (money + demand)
Selected AbstractsIssues in Money Demand: The Case of EuropeJCMS: JOURNAL OF COMMON MARKET STUDIES, Issue 4 2004Mike Artis This article establishes a co-integration analysis for the euro area (sample period: 1983,2000), identifying three co-integrating vectors: one which can be labelled money demand (in which real M3 money balances are related to output, with unit elasticity, and the long rate of interest); another pertaining to the spread between the short and long rate of interest; and a third which is an output (IS) relationship in which output is related to the real rate of interest. Currency substitution terms affect the adjustment of real money balances though they do not enter the co-integration space. We use the aggregation procedure for historical Euroland data advocated by Beyer, Doornik and Hendry for application to aggregation of money, GDP and prices when exchange rates were varying. We make use of the German short- and long-term interest rates as benchmarks for own rate and opportunity cost variables. [source] Money Demand in an EU Accession Country: A VECM Study of CroatiaBULLETIN OF ECONOMIC RESEARCH, Issue 2 2006Dario Cziráky O42; E13; E41; E51 Abstract The paper estimates the money demand in Croatia using monthly data from 1994 to 2002. A failure of the Fisher equation is found, and adjustment to the standard money-demand function is made to include the inflation rate as well as the nominal interest rate. In a two-equation cointegrated system, a stable money demand shows rapid convergence back to equilibrium after shocks. This function performs better than an alternative using the exchange rate instead of the inflation rate as in the ,pass-through' literature on exchange rates. The results provide a basis for inflation rate forecasting and suggest the ability to use inflation targeting goals in transition countries during the EU accession process. Finding a stable money demand also limits the scope for central bank ,inflation bias'. [source] A Note on Modelling Money Demand in Growing EconomiesBULLETIN OF ECONOMIC RESEARCH, Issue 1 2001Parantap Basu A prominent feature of US data is the lack of cointegration between nominal interest rates and M1 velocity. Yet, most general-equilibrium monetary models that have been used for empirical analysis have imposed cointegration between these two series. This paper presents as an alternative a money-in-the-utility function model which does not imply cointegration even though a well-defined stationary monetary equilibrium exists. [source] Financial Innovation and the Transactions Demand for CashECONOMETRICA, Issue 2 2009Fernando Alvarez We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We extend the Baumol,Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We characterize the solution of the model, which qualitatively reproduces several empirical patterns. We estimate the structural parameters using micro data and show that quantitatively the model captures important economic patterns. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, and the benefit of ATM ownership. [source] Currency boards: More than a quick fix?ECONOMIC POLICY, Issue 31 2000Atish R. Ghosh Once a popular colonial monetary arrangement, currency boards fell into disuse as countries gained political independence. But recently, currency boards have made a remarkable come-back. This essay takes a critical look at their performance. Are currency boards really a panacea for achieving low inflation and high growth? Or do they merely provide a ,quick fix' allowing authorities to neglect fundamental reforms and thus fail to yield lasting benefits? We have three major findings. First, the historical track record of currency boards is sterling, with few instances of speculative attacks and virtually no ,involuntary' exits. Countries that did exit from currency boards did so mainly for political, rather than economic reasons, and such exits were usually uneventful. Second, modern currency boards have often been instituted to gain credibility following a period of high or hyperinflation, and in this regard, have been remarkably successful. Countries with currency boards experienced lower inflation and higher (if more volatile) GDP growth compared to both floating regimes and simple pegs. The inflation difference reflects both a lower growth rate of money supply (a ,discipline effect'), and a faster growth of money demand (a ,credibility effect'). The GDP growth effect is significant, but may simply reflect a rebound from depressed levels. Third, case studies reveal the successful introduction of a currency board to be far from trivial, requiring lengthy legal and institutional changes, as well as a broad economic and social consensus for the implied commitment. Moreover, there are thorny issues, as yet untested, regarding possible exits from a currency board. Thus currency boards do not provide easy solutions. But if introduced in the right circumstances, with some built-in flexibility, they can be an important tool for gaining credibility and achieving macroeconomic stabilization. [source] Austria's Demand for International Reserves and Monetary Disequilibrium: The Case of a Small Open Economy with a Fixed Exchange Rate RegimeECONOMICA, Issue 281 2004Harald Badinger Using a vector error correction approach, I estimate Austria's demand for international reserves over the period 1985:1,1997:4 and test for short-run effects of the disequilibrium on the national monetary market. I find that Austria's long-run reserve demand can be described as a stable function of imports, uncertainty and the opportunity cost of holding reserves with strong economies of scale. The speed of adjustment takes a value of 38 per cent. The results confirm that an excess of money demand (supply) induces an inflow (outflow) of international reserves as postulated by the monetary approach to the balance of payments. [source] Demand for cash balances in a cashless economyINTERNATIONAL JOURNAL OF ECONOMIC THEORY, Issue 3 2009Richard Dusansky D11; D91; E41 We study the demand for cash balances in the year 2050, when people exclusively use debit cards for all transactions. Money no longer serves as a medium of exchange. However, money still retains its roles as unit of account, numeraire and store of value. We capture these roles in a multi-period model with intertemporal uncertainty regarding prices and the interest rate on bonds, the alternative asset. A key result of our analysis is that the standard negative relationship between money demand and the bond interest rate is seen to be part of a larger economic reality encompassing a broader range of empirically testable implications, including the possibility that the relationship may be positive. We develop formal structural restrictions under which the positive relationship between cash balance demand and the bond interest rate is not only a possible outcome, but an explicit prediction of the model. [source] The stabilization properties of fixed and floating exchange rate regimesINTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 2 2004Keith Pilbeam Abstract This paper investigates the price and output stabilization properties of fixed and floating exchange rates using a small open economy model. The performance of the two regimes is compared in the face of money demand, aggregate demand and aggregate supply shocks. It is shown that the ranking of the two regimes is extremely sensitive to the weighting of the objective function as between price and output stability, the type of shock impinging upon the economy, the values of structural parameters of the economy and institutional features such as the degree of wage indexation within the economy. The results obtained suggest that estimates of the income elasticity of money demand, the elasticity of aggregate demand to changes in both the real exchange rate and the real interest rate, and the degree of openness of the economy are likely to be important to policymakers when making the choice of exchange rate regime. Neither regime can be said to be dominant in all circumstances. Copyright © 2004 John Wiley & Sons, Ltd. [source] Issues in Money Demand: The Case of EuropeJCMS: JOURNAL OF COMMON MARKET STUDIES, Issue 4 2004Mike Artis This article establishes a co-integration analysis for the euro area (sample period: 1983,2000), identifying three co-integrating vectors: one which can be labelled money demand (in which real M3 money balances are related to output, with unit elasticity, and the long rate of interest); another pertaining to the spread between the short and long rate of interest; and a third which is an output (IS) relationship in which output is related to the real rate of interest. Currency substitution terms affect the adjustment of real money balances though they do not enter the co-integration space. We use the aggregation procedure for historical Euroland data advocated by Beyer, Doornik and Hendry for application to aggregation of money, GDP and prices when exchange rates were varying. We make use of the German short- and long-term interest rates as benchmarks for own rate and opportunity cost variables. [source] Measures of Fit for Rational Expectations ModelsJOURNAL OF ECONOMIC SURVEYS, Issue 3 2002Tom Engsted This survey provides a detailed description of some of the recent theoretical and empirical literature on rational expectations econometrics. The survey pays special attention to non,stationarity of the data, and to the various methods for evaluating rational expectations models that have been developed as alternatives to the classical statistical approach of testing overidentifying restrictions. These methods have become very popular and widely used in empirical research. We provide an illustration using Danish stock market data, and we summarize the many results obtained recently using these measures in areas as diverse as stock prices, the term structure of interest rates, exchange rates, consumption and saving, the balance of payments, tax,smoothing, hyperinflation, and linear quadratic adjustment cost models for inventories, labour demand, and money demand. [source] The representative household's demand for money in a cointegrated VAR modelTHE ECONOMETRICS JOURNAL, Issue 2 2000Thórarinn G. Pétursson A representative household model with liquidity services directly in the utility function is used to derive a stable, data congruent error correction model of broad money demand in Iceland. This model gives a linear, long-run relation between real money balances, output and the opportunity cost of holding money that is used to over-identify the cointegrating space. The over-identifying restrictions suggest that the representative household is equally averse to variations in consumption and real money holdings. Finally, a forward-looking interpretation of the short-run dynamics, assuming quadratic adjustment costs, cannot be rejected by the data. [source] The Functional Form Of The Demand For Euro Area M1THE MANCHESTER SCHOOL, Issue 2 2003Livio Stracca A remarkable development seen in recent years is the pronounced decline in euro area M1 velocity vis,à,vis a moderate decline in short,term interest rates, which represent the most natural opportunity cost for M1, suggesting an increase in the interest rate elasticity of M1 demand. In fact, estimating a theoretically plausible and stable demand function for M1 in the euro area is possible if a functional form of money demand allowing for an interest rate elasticity decreasing in size with the level of the interest rate is imposed. This finding would apparently suggest that the decline in inflation and nominal interest rates in Europe experienced in the run,up to the euro should have ,naturally' brought about an increased degree of preference for liquidity without any fundamental change in agents' preferences. To test the validity of this conclusion, a time,varying parameters model is estimated through a Kalman filter on the level of real M1, which is able to test simultaneously the stability of the parameters and the functional form of the demand for euro area M1. In this case, results clearly suggest the double,log function to be very close to the true ,deep' functional form of M1 demand in the euro area, consistent with the findings of Chadha, Haldane and Janssen for the UK and of Lucas for the USA. At the same time, there is evidence of an increased interest rate elasticity in M1 demand in the most recent years, presumably associated with the transition to the new environment prevailing from the start of Stage Three of European Monetary Union. [source] Money Demand in an EU Accession Country: A VECM Study of CroatiaBULLETIN OF ECONOMIC RESEARCH, Issue 2 2006Dario Cziráky O42; E13; E41; E51 Abstract The paper estimates the money demand in Croatia using monthly data from 1994 to 2002. A failure of the Fisher equation is found, and adjustment to the standard money-demand function is made to include the inflation rate as well as the nominal interest rate. In a two-equation cointegrated system, a stable money demand shows rapid convergence back to equilibrium after shocks. This function performs better than an alternative using the exchange rate instead of the inflation rate as in the ,pass-through' literature on exchange rates. The results provide a basis for inflation rate forecasting and suggest the ability to use inflation targeting goals in transition countries during the EU accession process. Finding a stable money demand also limits the scope for central bank ,inflation bias'. [source] Currency substitution, portfolio diversification, and money demandCANADIAN JOURNAL OF ECONOMICS, Issue 3 2006Miguel Lebre De Freitas Abstract We extend the Thomas (1985) dynamic optimizing model of money demand and currency substitution to the case in which the individual has restricted or no access to foreign currency denominated bonds. In this case currency substitution decisions and asset substitution decisions are not separable. The results obtained suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of currency substitution. Applying this approach to six Latin-American countries, we find evidence of currency substitution in Colombia, Dominican Republic, and Venezuela, but not in Brazil and Chile. Les auteurs prolongent le modèle d'optimisation dynamique de demande de monnaie et de substitution de devises de Thomas (1985) au cas où l'individu a un accès restreint ou nul aux débentures en devises étrangères. Dans ce cas, les décisions de substitution de devises et de substitution d'actifs ne sont pas séparables. Les résultats obtenus suggèrent que la nature significative d'une variable enregistrant une dépréciation anticipée du taux de change dans l'équation de la demande de monnaie nationale fournit un test valide de la présence de substitution de devises. En appliquant cette approche à six pays d'Amérique latine, on découvre qu'il y a évidence de substitution de devises en Colombie, en République dominicaine, et au Vénézuéla, mais pas au Brésil et au Chili. [source] | ||||||||||||||||||||||