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Money Demand and Economic Uncertainty

Joseph Atta-Mensah ()

Staff Working Papers from Bank of Canada

Abstract: The author examines the impact of economic uncertainty on the demand for money. Using a general-equilibrium theory, he argues that in a world inhabited by risk-averse agents, who are constantly making portfolio decisions against a backdrop of macroeconomic uncertainty, the demand for money is a function of real income and interest rates, and an index of economic uncertainty. The author then uses the Johansen procedure of cointegration to estimate the long-run stationary relationships between a Canadian monetary aggregate (M1, M1++, and M2++) and the explanatory variables. Allowing for an index of economic uncertainty to enter the short-run dynamics of the estimated model, the author obtains empirical results that show that, in general, increased economic uncertainty leads, in the short run, to a rise in the desired M1 and M1++ balances that agents would like to hold. The impact of economic uncertainty on M2++ is, however, observed to be negative.

Keywords: Monetary; aggregates (search for similar items in EconPapers)
JEL-codes: E41 E50 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2004
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Handle: RePEc:bca:bocawp:04-25