Costly Portfolio Adjustment and the Short-run Demand for Money

Timothy D Lane

Economic Inquiry, 1990, vol. 28, issue 3, 466-87

Abstract: In many empirical studies, the short-run demand for money includes a lagged dependent variable; this is usually attributed to some cost of adjusting money balances toward their desired level. This short-run, money-demand equation is sometimes used as a structural equation in models in which market clearing is also assumed (in the sense that money supply equals short-run money demand). In this paper, a theoretical counterexample demonstrates that this use of a short-run money demand equation is not generally valid. This finding challenges the usual interpretation of the lagged dependent variable. Copyright 1990 by Oxford University Press.

Date: 1990
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