A granular investigation on the stability of money demand

Zhengyang Chen and Victor J. Valcarcel

EconStor Open Access Articles and Book Chapters, 2024, issue FirstView articles, 1-26

Abstract: A large literature has shown money demand functions constructed from simple-sum aggregates are unstable. We revisit the controversy surrounding the instability of money demand by examining cointegrating income-money relationships with the Divisia monetary aggregates for the U.S., and compare them with their simple-sum counterparts. We innovate by conducting a more granular analysis of various monetary assets and their associated user costs. We find characterizing money demand with simple-sum measures only works well in a period preceding 1980. Divisia aggregates, their components, and their user costs provide a more reliable interpretation of money demand. Subsample analysis across 1980 and 2008 suggests the instability of money demand is a matter of measurement rather than a consequence of a structural change in agents’ preference for monetary assets.

Date: 2024
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Journal Article: A granular investigation on the stability of money demand (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:espost:303477

DOI: 10.1017/S1365100524000427

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