# **Demand for Base Money**

Given a constant base multiplier, the demand for real base money, or high-powered money, goes hand in hand with the demand for money. In fact, if we adjust the stock of money for changes in the base multiplier, the changes in the money stock will exactly mirror the changes in base money; and anything that changes the demand for money would change the demand for base money. This is a matter of arithmetic. Consequently, a change in the expected cost of holding money, a change in wealth (or permanent real income). or a change in regime -which would no doubt affect the demand for real moneywould also affect the real stock of base money.

Even assuming, as we should, that the multipliers are not constant, there is evidence that there is an stable demand for high-powered money. In fact, the monetary base competes with other conventional measures of money (MI, M2...M4) regarding its relative stability, and may even be a "better" definition of money. The problem with conventional definitions of money is that the empirical determinants of the demand for money are different according to the degree of "moneyness" of its components.

According to Friedman and Schwartz (1970), "The approach stressing the medium-ofexchange function of money has the virtue of possessing a fairly clear empirical counterpart.. .High powered money, not currency plus demand deposits, is the total that has the ...quality suggested as the relevant criteria." Friedman did not favor any a priory definition of money. His criteria was that money was that part of wealth that separated the act of purchase from the act of sale, and in this sense it was a temporary abode of general purchasing power and a stable function of few variables (Friedman 1969). In this sense the monetary base may be as good a definition as MI or M3.

These problems led James Lothian (1976) to focus on the demand for monetary base: _"The solution that Ipropose... is to return to a narrower definition of money, highpowered money alone. The rationale is that since high-powered money is of relatively constant quality over time and space.. specification errors are likely to be less important for high-powered money than for deposit-inclusive totals.... The demandfor highpowered money should be more stable than the demandfor other monetary aggregates.... I test this proposition by analyzing the demandfunctions for high-powered money andfor various other monetary assets estimated across an international time-section sample spanning forty countries in the postwar period... Ifind that high-powered money is unambiguously the most stable total across the countries in my sample. "_ According to Lothian (1976), the obvious implication of his findings in international studies in which the stability of the demand for money is a key assumption -for example in the monetary approach to the balance of payments or to exchange rate determinationis that a simpler definition of money might be very fruitful Moreover, we have found in this paper that real high-powered money is a key factor in the debt sustainability exercise. According to Lothian's analysis, the real base money would be a stable function of a few variables. The issue has not been settled and recently 15