Stability and the Demand for Money Function

Neil Thompson
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Neil Thompson: University of Salford

Chapter 6 in Portfolio Theory and the Demand for Money, 1993, pp 75-95 from Palgrave Macmillan

Abstract: Abstract The incorporation of proxies for risk and brokerage costs, and other specific tests of the theories outlined in Chapters 2, 3 and 4, are comparatively rare in empirical demand for money studies. Instead, most empirical work has concentrated upon the need to isolate a stable money demand function at the aggregate level, using the key opportunity cost and scale variables discussed in Chapter 5. Most studies published in the 1960s and early 1970s, such as Meltzer (1963), Brunner and Meltzer (1963), Laidler (1966a) and Goldfeld (1973) for the US, and Kavanagh and Walters (1966), Laidler and Parkin (1970) and Goodhart and Crockett (1970) for the UK, were able to find stable and well-determined money demand functions. The precise form of the equations, and the type and period of data used, varied between studies; static long-run equations of the form given in (5.3) were common for annual data, while studies using quarterly data generally estimated short-run equations, such as (5.6) and (5.14), which allowed for adjustment and expectational lags. The results, for the US in particular, were broadly invariant to the precise data period involved and the particular definitions of money, interest rate and scale variable used. Consequently, even though little attempt was made to test for stability in any rigorous manner, nobody seriously questioned the view that stable money demand functions could be isolated. Laidler (1971) was able to claim that, ‘The evidence for Britain certainly points to the existence of a stable demand for money function in that economy. For the United States the evidence is overwhelming, and for Britain it is at the very least highly. suggestive’.1

Keywords: Interest Rate; Money Demand; Cash Holding; Portfolio Theory; Building Society (search for similar items in EconPapers)
Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-22827-0_6

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DOI: 10.1007/978-1-349-22827-0_6

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