A CLOSER LOOK AT LONG‐RUN U.S. MONEY DEMAND: LINEAR OR NONLINEAR ERROR‐CORRECTION WITH M0, M1, OR M2?

Alfred Haug and Julie Tam

Economic Inquiry, 2007, vol. 45, issue 2, 363-376

Abstract: We study annual U.S. data from 1869 or 1900 to 1999. We find evidence for a well‐specified and stable model of money demand with data from 1946 to 1999. We carry out diagnostic and stability tests, including linearity tests. A linear error‐correction model with the monetary base performs better than a model with M1. A specification with M2 is not supported. We use real gross national product as the scale variable and a short‐term interest rate as the opportunity cost measure. We estimate an income elasticity of 0.86 and an interest rate elasticity of −0.44 for the monetary base. (JEL E41)

Date: 2007
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