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The Demand for Money at the Zero Interest Rate Bound

Tsutomu Watanabe and Tomoyoshi Yabu
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Tsutomu Watanabe: Graduate School of Economics, University of Tokyo
Tomoyoshi Yabu: Faculty of Business and Commerce, Keio University

No 44, Working Papers on Central Bank Communication from University of Tokyo, Graduate School of Economics

Abstract: This paper undertakes both a narrow and wide replication of the estimation of a money demand function conducted by Ireland (American Economic Review, 2009). Using US data from 1980 to 2013, we show that the substantial increase in the money-income ratio during the period of near-zero interest rates is captured well by the log-log specification but not by the semi-log specification, contrary to the result obtained by Ireland (2009). Our estimate of the interest elasticity of money demand over the 1980-2013 period is about one-tenth that of Lucas (2000), who used a log-log specification. Finally, neither specification satisfactorily fits post-2015 US data.

Keywords: money demand function; cointegration; zero lower bound; welfare cost of inflation; log-log form; semi-log form (search for similar items in EconPapers)
JEL-codes: C22 C52 E31 E41 E43 E52 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2022-12
New Economics Papers: this item is included in nep-mon
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