The Demand for M1 in the U.S.A., 1960–1988

Yoshihisa Baba, David Hendry and Ross M. Starr

The Review of Economic Studies, 1992, vol. 59, issue 1, 25-61

Abstract: Estimated U.S. M1 demand functions appear unstable, regularly "breaking down," over 1960–1988 (e.g. missing money, great velocity decline, M1-explosion). We propose a money demand function whose arguments include inflation, real income, long-term bond yield and risk, T-bill interest rates, and learning curve weighted yields on newly introduced instruments in M1 and non-transactions M2. The model is estimated in dynamic error-correction form; it is constant and, with an equation standard error of 0–4%, variance-dominates most previous models. Estimating alternative specifications explains earlier "breakdowns," showing the model's distinctive features to be important in accounting for the data.

Date: 1992
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