On the Effect of Government Spending on Money Demand in the United States: An ARDL Cointegration Approach

Esmaeil Ebadi

MPRA Paper from University Library of Munich, Germany

Abstract: This paper sheds light on the effect of government spending on money demand. The conventional literature of money demand has been developed with money demand defined as a function of income, interest rate, exchange rate, and inflation. I propose the new method of income decomposition to the public sector and the private sector following Barro’s (1990) spending model. I include government spending in the conventional money demand function to investigate the impact of government spending on the demand for money. The results confirm the long-run significant effect of government spending on money demand. In addition, I find that money demand tends to be unstable and moves on the edge of structural break during recessions. Moreover, the tendency of instability lasted longer in the early recession of 2000s than in the Great Recession 2007-2008 and the results do not support Friedman’s (1969) idea that the demand for money is “highly stable”. Instead, the findings suggest that money demand is “slightly stable” during recessions.

Keywords: Monetary Policy; Money Demand; Stability; ARDL Cointegration Approach (search for similar items in EconPapers)
JEL-codes: E41 E62 (search for similar items in EconPapers)
Date: 2018-04-28
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:86399

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