The Demand for Money: A Dynamic Rational Expectations Model

Keith Cuthbertson and Mark Taylor

Economic Journal, 1987, vol. 97, issue 388a, 65-76

Abstract: This paper presents and estimates a model of the demand for money which explicitly incorporates foward-looking behavior. A multiperiod, rational expectations, quadratic costs of adjustment problem is solved using the discrete time calculus of variations to yield a money demand equation which is both foward-looking and contains a lagged dependent variable, and nests partial adjustment and error correction alternatives. The equation is estimated jointlywith a vector autoregression for the forcing variables, subject to cross-equation restrictions in an attempt to circumvent the R. E. Lucas_(1976) critique, on U. K. data for narrow money, MI. The results are encouraging. Copyright 1987 by Royal Economic Society.

Date: 1987
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