Financial Market Risk and U.S. Money Demand

David Cook and Woon Gyu Choi

No 2007/089, IMF Working Papers from International Monetary Fund

Abstract: This paper examines empirically U.S. broad money demand emphasizing the role of financial market risk. We find that money demand rises with the liquidity risk of stock markets or the credit risk of corporate bond markets. After controlling for the effect of financial market risk, money demand becomes relatively stable over the last 35 years. At the sectoral level, household money holdings continue to be stable in a traditional model controlling for a decline in transactions costs for investing in mutual funds in the early 1990s. In contrast, business money holdings have been consistently (positively) associated with credit risk.

Keywords: WP; financial risk; rows E; regression E; money demand; financial market risk; stock market liquidity; money market mutual funds; financial risk model; liquidity risk; narrow money; money holding; opportunity cost; DOLS estimator; Demand for money; Liquidity risk; Market risk; Monetary base; Stock markets; Europe (search for similar items in EconPapers)
Pages: 33
Date: 2007-04-01
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Citations: View citations in EconPapers (5)

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