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International Evidence on Long-Run Money Demand

Luca Benati (), Robert Lucas, Juan Pablo Nicolini () and Warren Weber

No 587, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.

Keywords: Long-run money demand; Cointegration (search for similar items in EconPapers)
JEL-codes: E41 C32 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-06-18
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Working Paper: International Evidence on Long-Run Money Demand (2017) Downloads
Working Paper: International Evidence on Long Run Money Demand (2017) Downloads
Working Paper: International Evidence on Long Run Money Demand (2016) Downloads
Working Paper: International Evidence on Long Run Money Demand (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:587

DOI: 10.21034/sr.587

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