Modeling U.S. households' demand for liquid wealth in an era of financial change

Richard Anderson () and Sean Collins

No 1997-014, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Money demand models overpredicted M2 growth in the United States from 1990 to 1993. We examine this overprediction using a model of household demand for liquid wealth. The model is a dynamic generalization of the almost-ideal demand model of Deaton and Muellbauer (1980). We find that the own-price elasticity of money demand rose substantially after 1990. We also find important cross-price elasticities of money with respect to other liquid financial assets, notably with respect to mutual funds. Incorporating these and other features helps explain nearly 50 percent of the shortfall in M2 growth over the period in question. It also suggests that households respond more rapidly to changes in market interest rates than is assumed in some limited-participation general equilibrium macroeconomic models.

Keywords: Income; Liquidity (Economics); Wealth (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (2)

Published in Journal of Money, Credit, and Banking, February 1998

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Journal Article: Modeling U.S. Households' Demands for Liquid Wealth in an Era of Financial Change (1998)
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