Estimating Lagged Relationships in Corporate Demand for Liquid Assets

HE most important motivation for the T current study investigating the lagged relationships in corporate demand for liquid assets is the current controversy over lags in monetary policy. The literature is so wellknown that it need not be recapitulated here. The evidence that has been presented is of two kinds: the analysis based on turning points in different series, i.e., that by Friedman; and an analysis based on estimation of distributed lag relationships, i.e., by Karaken and Solow. The latter authors estimate distributed lag relationships in different sectors and simply add these up. However, as Tucker [12] has pointed out, in a general equilibrium context summing lags in various sectors to measure the lag in monetary policy is not a valid procedure. This implies that estimation of distributed lags should be done in a simultaneous equations context. But we feel that there are still several unresolved problems connected with the estimation of single equations. The present study, therefore, concentrates on estimating distributed lags in a single equation context, with a specific view of analyzing the merits and demerits of the various alternative estimation techniques proposed till now for the estimation of distributed lag models. We recognize that the controversy over lags in monetary policy must be resolved in a general equilibrium context, with additional evidence on the interactions among all variables, and especially on the lags in each component function. For manufacturing corporations there is little evidence on lags in liquid asset demand, since most studies do not focus explicitly on this problem. Only Heston [7] and Anderson [2] enter lagged dependent variables in their regressions to examine adjustment. However, neither study discusses various problems of statistical estimation and interpretation. Anderson finds that approximately one-third of the adjustment to equilibrium occurs in one quarter for cash while the figure is about onefourth for government securities. ' On the other hand, Heston discovers that cash adjusts less than two-thirds of the way to equilibrium in one year, and government securities less than one-half.2 The number of aggregate time-series studies of money demand dealing explicitly with lags is also not large, nor are the statistical procedures particularly sophisticated. In one of the earliest studies using a lagged model, Bronfenbrenner and Mayer [3] find that the implied speed of adjustment toward equilibrium is onefourth to one-half per year. Treating money supply as an endogenous variable and using the technique of two-stage least squares, Teigen [11] observes that during the postwar period, one-third of the adjustment to equilibrium occurs in a quarter, while for the interwar period about one-half of the adjustment takes place in a year.3 A study of money demand by Chow [4] also considers the question of lagged adjustment at length, both by contrasting permanent income and wealth with current income and by including lagged dependent variables.4 Chow finds that the speed of adjustment is less than one-half in the first year. In a Federal Reserve study, De Leeuw [5] employs alternative estimation techniques in an attempt to deal with the problems of serial correlation and lagged adjustment. He concludes his analysis saying "the long lag hypothesis emerges from tests against post-war data