Financial Innovation and the Control of Monetary Aggregates: Some Evidence from Canada

Robert Lucas

No 1157, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents an empirical test of the proposition that control of a monetary aggregate will generate a rise in its velocity.The test is carried out utilizing the Canadian experience of controlling Ml growth from 1975:3 to 1982:3. Section One of the paper presents evidence of the instability of the Canadian demand from Ml money since 1975:3. Section Two develops a specific form of the proposition which emphasizes the role of asset substitution between classes of chartered bank deposits. A relative asset demand equation is derived from a wealth maximization model subject to a technological transactions constraint and this equation is estimated from 1961 through 1982.The results lend support to the proposition that central bank control of Ml generated a rise in Ml velocity.

Date: 1983-06
Note: ME
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Published as Lucas, Robert E. "Financial Innovations and the Control of Monetary Aggregates: The Canadian Experience," Western Economic Review, Vol. 4, No. 4, December 1985.

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