Money demand heterogeneity and the great moderation

Pablo A. Guerron

Journal of Monetary Economics, 2009, vol. 56, issue 2, pages 255-266

Abstract: A forward-looking model of the demand for money based on heterogeneous and sluggish-portfolio adjustment can simultaneously account for the low short-run and high long-run semi-elasticities reported in the literature. The parameter estimates from the model for the short-run and long-run interest semi-elasticities are 1.04 and 13.16, respectively. A simulated version of the model suggests that the Great Moderation can be partially attributed to financial innovations in the late 1970s. When moving toward a more flexible portfolio, the model can account for almost one-third of the observed decline in the volatilities of output, consumption, and investment.

Keywords: Financial; innovation; Great; moderation; GMM; Money; demand; Sluggish-portfolio; adjustment; Monetary; and; technology; shocks (search for similar items in EconPapers)
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:2:p:255-266

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