Creator: Benati, Luca, Lucas, Jr., Robert E., Nicolini, Juan Pablo, and Weber, Warren E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 587 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.
Keyword: Cointegration and Long-run money demand Subject (JEL): E41 - Demand for Money and C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Creator: Benati, Luca, Lucas, Jr., Robert E., Nicolini, Juan Pablo, and Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 737 Abstract:
We explore the long-run demand for M1 based on a data set that has comprised 32 countries since 1851. In many cases, cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I and for moderate and high-inflation countries. With the exception of high-inflation countries–for which a “log-log” specification is preferred–the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960). This is especially clear for the United States and other low-inflation countries.
Keyword: Long-run money demand and Cointegration Subject (JEL): C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models and E41 - Demand for Money
Creator: Braun, R. Anton and Christiano, Lawrence J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 529 Abstract:
The money demand literature presents much conflicting evidence on this question. For example, Lucas (1988) reports unrestricted money demand regressions which seem to imply that long-run money demand elasticities are highly unstable across subsamples. At the same time, he also presents evidence from money demand regressions with the income elasticity restricted to unity which seem to suggest stability. We conduct a formal analysis which weighs these apparently conflicting facts to determine which hypothesis is more plausible; the hypothesis that money demand is stable, or the hypothesis that money demand is unstable. We find that the stability hypothesis is the more plausible one. Thus, according to our data set, the answer to the question in the title is "yes".
Keyword: M1, Money supply, Money demand, Regression analysis, and Money demand regressions Subject (JEL): E41 - Demand for Money and E51 - Money Supply; Credit; Money Multipliers
Creator: Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 568 Abstract:
Using an existing random matching model of money, I show that a once-for-all change in the quantity of money has short-run effects that are predominantly real and long-run effects that are in the direction of being predominantly nominal provided (i) the quantity of money is random and (ii) people learn about what happened to it only with a lag. The change in the quantity of money comes about through a random process of discovery that does not permit anyone to deduce the aggregate amount discovered when the change actually occurs.
Subject (JEL): E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Lucas, Jr., Robert E. and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 718 Abstract:
We show that regulatory changes that occurred in the banking sector in the early eighties, which considerably weakened Regulation Q, can explain the apparent instability of money demand during the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for the entire period 1915-2012.
Keyword: Money demand and Monetary base Subject (JEL): E41 - Demand for Money and E40 - Money and Interest Rates: General
Creator: Bryant, John B. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 038 Abstract:
No abstract available.
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 246 Abstract:
Many economists have worried about changes in the demand for money, since money demand shocks can affect output variability and have implications for monetary policy. This paper studies the theoretical implications of changes in money demand for the nonneutrality of money in the limited participation (liquidity) model and the predetermined (sticky) price model. In the liquidity model, we find that an important connection exists between the nonneutrality of money and the relative money demands of households and firms. This model predicts that the real effect of a money shock rose by 100 percent between 1952 and 1980, and subsequently declined 65 percent. In contrast, we find that the nonneutrality of money in the sticky price model is invariant to changes in money demands or other monetary factors. Several researchers have concluded from VAR analyses that the effects of money shock over time are roughly stable. This view is consistent with the predictions of the sticky price model, but is harder to reconcile with the specific pattern of time variation predicted by the liquidity model.
Keyword: Money shocks, Liquidity, Sticky prices, and Velocity Subject (JEL): E52 - Monetary Policy, E32 - Business Fluctuations; Cycles, and E41 - Demand for Money