institutional change and the velocity of money a century of evidence we study common features in the income velocity of money income and interest rates for canada the u s the u k sweden and norway using annual data from 1870 the recently developed and refined techniques of testing for cointegration are employed the evidence suggests there is a unique long run relationship in velocity but not in income and interest rates moreover we find that only a model which includes institutional change proxies is properly specified we argue that the evidence is best interpreted in the context of common historical developments in the respective countries financial systems

the long and short of money short run dynamics within a structural model empirical examinations into aggregate money demand functions generally incorporate a monetary aggregate as the dependent variable while this custom may be inefficient it does not create any new difficulties for estimating the demand function s long run parameters as money supply would equal money demand the short run estimates however are not as fortunate as the monetary aggregate is a measure of supply and not demand one needs to tease out the short run responses associated with money demand changes with those which are associated with monetary supply shocks the present article therefore proposes a more complete representation of monetary sector behaviour and in doing so finds significant support for the so called buffer stock money demand models

on the impossibility of a stable and low gdp elasticity of money demand the arithmetic of aggregation replication and income growth this paper shows the aggregate income gdp elasticity of money demand depends on the elasticity at the individual level and on population growth as money regressions are usually formulated using us post ww ii data a low and stable aggregate income elasticity implies a negative and unstable elasticity at the individual level likewise positing a stable and non unitary individual income elasticity implies wide variation in the conventional gdp elasticity over time it has been possible to ignore these issues in empirical work due to collinearity between regressors and population even for differenced data measuring money and income on a per household basis is a simple way to avoid these problems and to distinguish income from mere replication effects

international monetary regimes and incidence and transmission of macroeconomic shocks evidence from the bretton woods and modern floating periods this paper investigates the relationship between international monetary regimes and incidence and transmission of macroeconomic shocks within the context of an open economy macro model empirical results confirm monetary interdependence and lower incidence of monetary discretion under fixed exchange rates the average magnitude and dispersion of supply shocks in bretton woods and the subsequent float is comparable however the average magnitude and dispersion of real demand shocks under bretton woods seems higher overall the international monetary regime may pose important constraints to policymakers in open economies economists have long recognized the role of a flexible exchange rate regime in insulating economies and allowing independent pursuit of monetary policy however experience with floating rates in the post bretton woods period led many to question the merits of flexible rates with increased volatility in nominal and real exchange rates and the implied effects of this volatility on international trade flows although fixed rates reduce uncertainty and transaction costs compared with flexible rates these benefits may be outweighed by increased output volatility due to sticky prices and increased international interdependence if countries face idiosyncratic shocks independent monetary policy is needed to stabilize the domestic economy theoretical work on the effects of international monetary regimes has been inconclusive helpman 1981 dornbusch 1983 turnovsky 1983 and others provide evidence that exchange rate arrangements cannot be ranked unambiguously in terms of their impact on macroeconomic stability or domestic welfare instead several studies have analyzed macroeconomic performance under different historical exchange rate arrangements using macroeconomic data from the bretton woods and the subsequent floating regime baxter and stockman 1988 found no clear relationship between exchange rate flexibility and output stability or synchronization of the business cycle using bivariate vector autoregressions vars bayoumi and eichengreen 1994 analyzed the standard

modeling monetary trends in italy using historical data the demand for broad money 1861 1990 in this paper we estimate a stable demand for money relationship for italy using a long series of historical data we extend previously available data sets to obtain a sample for the years 1861 to 1990 and use cointegration analysis and two stage estimation procedures to obtain a dynamic model for m2 demand by employing a small number of explanatory variables and a nonlinear error correction model we find a stable demand for money relationship our model incorporates significant inflation and interest rate effects in contrast to previous studies of this type

another look at long run money demand abstract this paper investigates the long run demand for m1 in the postwar united states previous studies based on data ending in the late 1980s are inconclusive about the parameters of postwar money demand this paper obtains precise estimates of these parameters by extending the data through 1996 the income elasticity of money demand is approximately 0 5 and the interest semi elasticity is approximately 0 05 these parameters are significantly smaller in absolute value than the corresponding parameters for the prewar period a caveat is that the analysis assumes there is no trend in money demand resulting from technological change

the demand for m1 in the u s a 1960 1988 estimated u s m1 demand functions appear unstable regularly breaking down over 1960 1988 e g missing money great velocity decline m1 explosion we propose a money demand function whose arguments include inflation real income long term bond yield and risk t bill interest rates and learning curve weighted yields on newly introduced instruments in m1 and non transactions m2 the model is estimated in dynamic error correction form it is constant and with an equation standard error of 0 4 variance dominates most previous models estimating alternative specifications explains earlier breakdowns showing the model s distinctive features to be important in accounting for the data

reinterpreting the dhsy 1978 consumption function with hindsight the justification for davidson hendry srba and yeo s dhsy s selection of their favoured equation is shown to be based upon contradicting assumptions about inflation the empirically supported model is argued not to have a theoretically justified error correction interpretation the exclusion of the intercept biases the error correction term such that it becomes significant and negative but undermines the theoretical plausibility of the long run target more generally the statistical need to include an intercept in any regression to avoid parameter bias is demonstrated the rise in inflation in the 1970s is not considered to be a credible explanation of the fall in the average propensity to consume apc from the 1950s and is shown to have questionable empirical support when a below unit income elasticity is allowed for the recent articles which have found support for dhsy s favoured formulation augmented by time varying parameters using the most contemporary uk data should be viewed with caution new interpretations for the dhsy model s persistent success are called for if it is not to be considered that dubious regressions have been resurrected

cointegration and structural change an application to the u s demand for money wankeun oh i perform the cointegration tests for the trivariate model of real monetary aggregates real personal income and short term interest rate i find the existence of a long run relationship among these three variables to check the stability of a long run money demand relationship i implement a rank constancy test and cusum test the test results show that real mi is relatively more stable than other aggregates but structural change occurred during the 1970s and early 1980s this is consistent with prior research on money demand jel e41 i introduction incorporating structural change when performing tests on the properties of stochastic processes is important because structural breaks may cause misspecification problems most tests of structural change consider the stability of the parameters over time tests for structural breaks and parameter stability have been studied extensively a partial list includes chow 1966 brown et al 1975 harvey and collier 1977 king 1987 ploberger et al 1989 in the context of unit root processes perron 1989 showed that the presence of a one time change in the level or slope of the trend function can severely distort the results of unit root tests and it is natural to ask how structural change can distort the results of cointegration tests 1 traditional tests of parameter stability ask if the parameters of the model are constant in contrast quintos 1993 proposed a test for stability of the long run relationship s in a cointegrating regression the test is based on johansen s 1988 framework and the test statistic is simply the weighted sum of the likelihood ratio test as given in johansen 1988 quintos s rank test is very different from the traditional cusum and chow tests for parameter stability because her rank test checks for stability of the cointegrating relationship between variables in other words the rank test checks whether cointegration holds for the full period the traditional cusum and chow tests assume that cointegration holds for the full period or does not hold for the full period and tests simply whether the cointegration vector changes for example if there is cointegration from 1960 1990 between revenues and expenditures with cointegrating vector 1 1 then the cusum and chow tests check whether the cointegra ting vector 1 1 is stable throughout the period the rank constancy test checks whether the cointegration rank is stable throughout the period not whether the cointegrating vector is stable at 1 1 in other words the rank test will check whether for example there is cointegration from 1960 1980 and no cointegration from 1980 onward the chow and cusum tests are not designed to check for this the structural stability of money demand relationships has been the issue of a substantial number of empirical studies 2 in general structural stability means stability of the underlying behavioral equations 3 this term includes parameter stability and stability of functional form friedman s 1990 research on the money demand function assumes that a long run equilibrium relationship exists between real money balances real income or real wealth and the opportunity cost of holding real money balances recently there has been strong evidence of cointegration between real income real money balances and a nominal interest rate for instance engle and granger 1987 dickey et al 1991 hafer and jansen 1991 hoffman and rasche 1991 mehra 1993 miller 1991 fischer and nicoletti 1993 and baba et al 1992 report on cointegration among variables in u s aggregate money demand jain and moon 1994 report on cointegration in u s sectoral money demand yashiv 1994 and engsted 1993 on money demand in a high inflation country and hoffman et al 1995 report on international money demand comparison this article asks if long run money demand relationship is stable and if so for which measure of money is it stable over time

australasian money demand stability application of structural break tests estimates of the demand for money provide important foundations for monetary policy setting but if the estimation technique does not explicitly account for structural changes then such estimates will be biased this paper presents an investigation into the level and stability of money demand m1 for australia and new zealand over the 1960 2009 period and demonstrates that both countries experienced regime shifts australia also experienced an intercept shift application of four time series methods provide consistent results with 1984 and 1998 break dates cusum and cusumsq stability tests reveal that m1 demand functions were unstable over the 1984 to 1998 period for both countries although tests for stability are not rejected thereafter

short interest and the asymmetry of the price volume relationship in the canadian stock market abstract several studies have revealed an asymmetry in the price volume relationship in the equities markets this paper verifies this relationship using canadian data and presents an alternative test of the costly short sales hypothesis based on the volume of outstanding short interest in the stock market contrary to previous studies the empirical tests in this study do not rely on futures markets data but rather measure and compare the effects of relative short interest positions on the price volume relationship for positive and negative price changes the results suggest that the greater the ratio of short positions to the number of shares outstanding the greater the trading volume associated with price increases relative to that accompanying price decreases

long run income and price elasticities of demand for colombian nontraditional exports a multivariate cointegration framework a long run income and price elasticities of demand is estimated for colombian nontraditional exports through a multivariate cointegration analysis based on the combination of cointegration and exogeneity concepts and the inclusion of the complete dynamic system the paper shows the existence of a long run relationship among nontraditional exports relative price and foreign demand and higher long run elasticities than those provided by the long run cointegration vector coefficients that are usually reported in the trade literature

regression direction and weak exogeneity abstract the absence of testing for weak exogeneity in money demand has often led to stark conditioning claims regarding the validity of price equations this paper uses the johansen procedure to explore the conditioning properties of money demand systems for nonborrowed reserves m1 and m2 our results show that irrespective of the specification of the cointegrating relation a feedback mechanism enters the equation for money the opposite however is not true for the price equations the results also cast a warning for single equation models of money demand in that weak exogeneity is sensitive to how the system is defined

short run money demand abstract the conventional wisdom holds that the short run demand for money is unstable this paper challenges the conventional view by finding a stable demand for m1 in u s data from 1959 through 1993 the approach follows previous work in interpreting long run money demand as a cointegrating relation and it uses goldfeld s partial adjustment model to interpret short run dynamics the key innovation is the choice of the interest rate in the money demand function most previous work uses a short term market rate but this paper uses the average return on near monies the savings accounts and money market mutual funds that are close substitutes for m1 this choice helps rationalize the behavior of money demand in particular the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies

i 2 representations of us money demand abstract researchers have found success in estimating i 2 representations of money demand for other countries using a general equilibrium cash credit model an i 2 model for the united states is tested no bias is found from treating the variables as i 1

on the reinterpretation of money demand regressions a stylized fact concerning estimated money demand relationships is that lagged dependent variables have high explanatory power and large estimated coefficients which is hard to explain at a theoretical level marvin s goodfriend 1985 suggests that this may be due to the presence of serially correlated measurement errors in the independent variables the author demonstrates how consistent estimates of the short run demand function can be obtained even if the goodfriend hypothesis is accepted and also how the hypothesis might be tested application of the suggested test using the goldfeld 1973 data set leads to decisive rejection of the hypothesis copyright 1994 by ohio state university press

microfoundations and the demand for money the reader should note that i write this piece in a style that aims to be accessible to that much neglected representative agent the woman on the eurostar train hence unlike the man on the clapham omnibus i assume my intrepid traveller has reasonable knowledge of monetary economics and econometrics but not of the details of the demand for money space constraints force me to indulge in a certain amount of poetic licence but i hope this results in poetic justice there have been many wars fought on this particular battlefield some with almost religious zeal on the theoretical side of the debate we sometimes have the equivalent of religious fundamentalists be they muslims jews christians etc who would dismiss almost any evidence unless it were associated with a strong microtheoretic basis as laid down in the koran talmud or bible the empirical side encompasses agnostics atheists as well as born again econometricians pure theorists inhabit the sunlit uplands while applied economists and policymakers flounder in the muddy plain below occasionally gaining solace from their copy of zen and the art of motorcycle maintenance in general in economics we do not have the luxury of controlled experiments as is the case in the natural sciences what distinguishes good microfoundations from bad and how to weight priors and statistical evidence is subject to much dispute leamer i983 hendry et al i990 as in religion sometimes there is the occasional miracle proclaimed after a suitable interval a new saint may be declared and disciples flock to the new shrine later doubts may arise as to whether a miracle really did occur human behaviour is difficult to explain let alone predict so the search for the equivalent of the holy grail ark of the covenant etc is bound to be arduous in scholarly journals we generally read of the success of the demand for money like diplomats who are sent abroad to lie for the good of their country publication may require applied economists to be somewhat economical with the actualite lovell i983 leamer i983 in this article i want to be as honest as possible about our success and failures in this area the prior information an armchair economist would consider when thinking about the demand for money over the past 40 years in western industrialised countries which have experienced moderate inflation might

consumer credit in an era of financial liberalization an overreaction to repressed demand in this article we empirically analyse the factors which determined consumer credit in greece in the period before and after the financial liberalization while accounting for significant changes in structure due to the lifting of credit restrictions and the subsequent impressive boom of consumer loans we use multivariate cointegration techniques to estimate a vector error correction model vecm and identify separate demand and supply relationships for consumer loans we introduce demand and supply related shifts in parameters through the inclusion of appropriate dummy variables and trends in the long run relationships we partly deviate from the typical johansen procedure and estimate the model in two steps we find that the theoretical exclusion and coefficient size restrictions on the demand and supply cointegrating vectors are valid our results are consistent with the operation of a bank lending channel in greece we also find that the supply side was mostly responsible for the acceleration of con

nonlinear equilibrium correction in u s real money balances 1869 1997 several theoretical models of money demand imply nonlinear functional forms for the aggregate demand for money characterized by smooth adjustment toward long run equilibrium in this paper we propose a nonlinear equilibrium correction model of u s money demand that is shown to be stable over the sample period from 1869 to 1997

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

money demand during hyperinflation and stabilization bulgaria 1991 2000 the demand for money in bulgaria is estimated over a ten year period 1991 2000 of high inflation and inflation uncertainty the paper distinguishes between three well defined sub periods high variable but not systematically accelerating inflation from 1991 until april 1996 the near hyperinflation period from may 1996 to february 1997 and the subsequent stabilization after the adoption of a currency board the empirical analysis utilizes a standard methodology of cointegration and error correction the functional determinants of the demand for money change during the different sub periods during the hyperinflation episode cagan s model is employed

a money demand function with output uncertainty monetary uncertainty and financial innovations in a general equilibrium framework incorporating the money in the utility function approach we show that output uncertainty and monetary uncertainty as well as output interest rates and financial innovations affect money demand the estimated long run relationships are consistent with our postulated relation but not with the conventional one our model delivers a high income elasticity consistent with cross sectional evidence and helps resolve m1 demand puzzles the model estimated in dynamic error correction form exhibits a good level of stability and forecastability providing little support for the recent de emphasis of monetary aggregates due to the instability of money demand

currency substitution and nonlinear error correction in taiwan s demand for broad money we modify the conventional money demand function by including a real exchange rate variable to reflect the effect of currency substitution empirical evidence indicates that the variable is crucial to the long run stability of taiwan s money demand after finding the failure of a linear error correction model ecm in describing the dynamics of taiwan s money demand we apply a nonlinear ecm to examine its dynamics and support the appropriateness of the nonlinear model empirically

the demand for m3 in the euro area in this paper an empirically stable money demand model for m3 in the euro area is constructed starting with a multivariate system three cointegrating relationships with economic content are found i the spread between the long term and the short term nominal interest rates ii the long term real interest rate and iii a long run demand for broad money m3 there is evidence that the determinants of m3 money demand are weakly exogenous with respect to the long run parameters hence following a general to specific modelling approach a parsimonious conditional error correction model for m3 money demand is derived which can be interpreted economically for the conditional model long run and short run parameter stability is extensively tested and not rejected copyright 2001 john wiley sons ltd

a closer look at long run u s money demand linear or nonlinear error correction with m0 m1 or m2 i introduction the stability of money demand has been a long standing issue 1 lucas 1988 informally analyzes the stability of a log linear m1 money demand function and concludes that real money demand is a stable function and he supports earlier findings of meltzer 1963 with an income or wealth elasticity of around unity 2 with the development of cointegration methods engle and granger 1987 numerous empirical studies have applied these techniques to long run u s money demand examples are baba hendry and starr 1992 haferand jansen 1991 hoffman and rasche 1991 and miller 1991 who find support for a cointegrated money demand model with either m1 or m2 3 king et al 1991 also find support for cointegration with m2 and a short term interest rate in contrast to these studies others have argued against a stable u s money demand function in the postwar period for example friedman and kuttner 1992 do not find support for cointegration particularly when the period march 1970 to april 1990 is considered similarly miyao 1996 studies the behavior of the m2 money demand function over the period from 1959 to 1993 with quarterly data and various interest rates in levels and in logs miyao concludes that m2 is not a useful intermediate target for monetary policy in the 1990s 4 however carlson et al 2000 reach the conclusion that m2 does have predictive content for nominal economic activity and that the real m2 money demand function is stable but only after accounting for financial innovation in the first half of the 1990s two recent papers ball 2001 and stock and watson 1993 focus on especially long data sets for the united states and m1 stock and watson 1993 analyze various estimation methods for cointegrating relationships and illustrate their performance for money demand functions with annual data from 1900 to 1987 they pay particular attention to the postwar period and use monthly data in addition to annual data for this period they employ a semi log linear real m1 money demand model with real net national product and the level of the 6 mo commercial paper rate for the postwar period they also consider the 90 day treasury bill rate and the 10 yr treasury bond rate they compare and contrast their results to those of various others they also carry out recursive estimations to check their results for stability stock and watson 1993 conclude that a long span of data is needed to estimate long run money demand functions precisely their overall evidence is in favor of a stable long run money demand function with an income elasticity near one and an interest rate semielasticity near 0 10 however the postwar data are found to be not very informative a lack of low frequency variation in the postwar data as suggested by lucas 1988 does not allow a disentangling of the effects of output and interest rates on money demand for this time period estimates are imprecise and sensitive to subsample specifications due to substantial colinearity ball 2001 revisits the m1 money demand model of stock and watson 1993 using the same data set but extended through 1996 he applies the same array of estimation techniques as stock and watson did ball obtains precise estimates over the postwar period for his extended data set an income elasticity of approximately 0 5 and a semielasticity of 0 05 for the interest rate he does not find support for a velocity specification the m1 model is not stable over the period 1900 1996 lutkepohl terasvirta and wolters 1999 apply a nonlinear error correction model with smooth transition adjustment to capture instabilities in the linear cointegration model the long run equilibrium is described by a linear cointegrating relation and the adjustment to this long run equilibrium is nonlinear they analyze german m1 money demand granger and terisvirta 1993 terasvirta 1998 and van dijk terasvirta and franses 2002 provide details on the econometric theory for estimating and testing such nonlinear models

trading off the benefits and costs of choice evidence from australian elections abstract i investigate the robust predictions of a theory on the costs and benefits of dealing with increased numbers of choices in an election context my data consist of a rich array of measures of voting behaviors and corresponding ballot and voter population characteristics for a panel of electoral districts from three australian federal election cycles i examine how the number of candidates and voting tickets on the ballot as well as key moderating variables affect the share of voters 1 opting for a simplified alternative to the baseline voting process and 2 intentionally casting an invalid ballot the findings indicate that incremental options can increase or decrease motivation to engage in a choice process the overall pattern of results appears consistent with a diminishing returns model of expanded choice voters appear to trade off costs and benefits rationally in their decisions concerning how and whether to make choices public policies and private strategies should leverage moderating variables to encourage participation in choice processes and should account for opt out tendencies at both ends of the choice spectrum

modelling british interest rate adjustment an error correction approach an error correction model is used to capture the dynamics of british retail deposit and loan rate responses to changes in the central bank s base rate the test is conducted using a monthly series of interest rates for four generic retail banking products over the period 1986 93 the adjustment process is found to vary considerably between and within banks and products the results suggest that this market continues to exhibit many features of imperfect competition and that adjustment differences could affect the speed of the money transmission mechanism

money demand during hyperinflation and stabilization bolivia 1980 1988 i introduction the stability of demand for money equations has been at issue in both econometric research and policy analysis the academic debates about the relative merits of the traditional buffer stock and the error correction models of demand for money have centered on parameter stability 1 in policy discussion the scope for remonetization following stabilization depends on the upward shift in the demand for money and the consequent predictability of higher money demand with lower rates of inflation 2 only an increased demand for money would make further credit expansion non inflationary inflation uncertainty has a pervasive effect in the money price nexus high inflation uncertainty makes money a riskier asset depressing the demand for money on a long term and possibly short term basis this impact on the demand for money means that policies influencing inflation will have an additional effect through their impact on inflation uncertainty as well as on expected inflation this paper examines the role of inflation uncertainty in a dramatic case study bolivia during the 1980s this was a decade of extreme macroeconomic instability annual inflation rates reached over 20 000 percent motivating a subsequent stabilization which drove annual inflation rates down to less than 25 percent where they have remained for more than five years perhaps more than any other country in recent history bolivia has undergone a dramatic structural shift in its macroeconomic policy regime to what extent did the demand for money shift during this period in its sensitivity to expected inflation inflation uncertainty and to underlying monetary disequilibria as the inflation stabilization progressed how fast did the money demand parameters react to this new regime change was there scope for remonetization in bolivia following the now famous stabilization plan of august 1985 the new economic plan introduced by president victor paz estenssoro 3 previous literature on the demand for money has explored the role of inflation uncertainty with ambiguous results 4 klein 1977 observed that inflation rate uncertainty reduced the average and marginal productivity of real cash balances in providing monetary services effectively a greater volume of real cash balances is required to obtain the same quality adjusted level of cash balances while the impact on the demand for money is theoretically uncertain because the income and substitution effects work in opposite directions klein provided empirical evidence that inflation uncertainty measured by a moving five year variance around a moving ten year trend with data from 1880 to 1972 actually increased the demand for money in the united states around the same time boonekamp 1978 presented a two period mean variance model of money and bond demand highlighting the potential importance of a hedging role in the demand for money in the face of inflation uncertainty related to aspects of both of these two approaches and working with a capital asset pricing model capm sweeney 1988 drew on university of michigan survey data on inflationary expectations to resolve the theoretical ambiguity of the impact of inflation uncertainty his results based on post war quarterly u s data contrasted with those of klein by showing a negative impact of inflation uncertainty on money demand in his study of the demand for money in the six hyperinflations originally examined by cagan 1956 khan 1977 measured inflation uncertainty by the absolute value of the change in inflation his model assumed that inflation uncertainty would affect the demand for money not directly but by altering the adaptive expectations parameter in the adjustment of inflation expectations his empirical estimates implied a negative impact of inflation uncertainty on the demand for money during accelerating inflation engle 1982 introduced the concept of arch autoregressive conditional heteroskedastic models with a specific application to inflation expectations