Financial innovations and the interest elasticity of money demand: Evidence from an error correction model

Masoud Moghaddam

Atlantic Economic Journal, 1997, vol. 25, issue 2, 155-163

Abstract: The difficulty of estimating a stable money demand function has been blamed on financial innovations of the past two decades. Gurley and Shaw's [1960] thesis implies that a proliferation of money-like assets resulting from financial innovations increased the interest elasticity of money demand. However, Hafer and Hein [1984] provided empirical evidence to the contrary. This paper presents the empirical results of the M2 demand for money using an error correction model for the period 1959:1–87:4 and two subperiods 1959:1–73:4 and 1974:1–87:4. The findings suggest lower interest and price elasticities for money demand in the second sample in which money substitutes proliferated. Copyright International Atlantic Economic Society 1997

Date: 1997
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DOI: 10.1007/BF02298382

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