GMM Estimation of a Money-in-the-Utility-Function Model: The Implications of Functional Forms

Holman, Jill A.

doi:10.2307/2601124

Cited by 58 publications

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“…Chadha, Haldane and Janssen (1998) showed that if the utility function is well behaved, a double log functional form of money demand arises naturally. It is easy to show that this is also valid in the Holman (1998) context, where monetary instruments are interest bearing. For instance, we consider a CES instantaneous utility function, which is fairly general and widely used in empirical applications: , …”

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confidence: 99%

“…In general, the functional form of money demand depends on the functional forms of both the leisure function and of the instantaneous utility . As in Holman (1998), we assume that is a function of real balances only; under these conditions, and assuming that the utility function is well behaved (i.e., it is increasing in its arguments at a decreasing rate), the Euler equation for real balances is as follows:…”

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confidence: 99%

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The Functional Form Of The Demand For Euro Area M1

Stracca

2003

The Manchester School

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A remarkable development seen in recent years is the pronounced decline in euro area M1 velocity vis–à–vis a moderate decline in short–term interest rates, which represent the most natural opportunity cost for M1, suggesting an increase in the interest rate elasticity of M1 demand. In fact, estimating a theoretically plausible and stable demand function for M1 in the euro area is possible if a functional form of money demand allowing for an interest rate elasticity decreasing in size with the level of the interest rate is imposed. This finding would apparently suggest that the decline in inflation and nominal interest rates in Europe experienced in the run–up to the euro should have ‘naturally’ brought about an increased degree of preference for liquidity without any fundamental change in agents’ preferences. To test the validity of this conclusion, a time–varying parameters model is estimated through a Kalman filter on the level of real M1, which is able to test simultaneously the stability of the parameters and the functional form of the demand for euro area M1. In this case, results clearly suggest the double–log function to be very close to the true ‘deep’ functional form of M1 demand in the euro area, consistent with the findings of Chadha, Haldane and Janssen for the UK and of Lucas for the USA. At the same time, there is evidence of an increased interest rate elasticity in M1 demand in the most recent years, presumably associated with the transition to the new environment prevailing from the start of Stage Three of European Monetary Union.

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The Functional Form Of The Demand For Euro Area M1

Stracca

2003

The Manchester School

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“…1. See Holman (1998) for evidence concerning the relevance of this money-in-the-utility function approach.…”

Section: Policy Implications and Conclusionmentioning

confidence: 99%

Currency substitution, seigniorage, and currency crises in interdependent economies

Daniels

VanHoose

2003

Journal of Economics and Business

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“…1 Stochastic decision problems that include monetary or …nancial assets have been used to address a variety of topics including asset pricing [2,15,29,30,41,51], price dynamics [23,32,40,42,43], intertemporal substitution [26], money demand [21,33], currency substitution and exchange rates [6,34], optimal monetary policy [16,17,18,19,20,25], and monetary aggregation [3,4,5,46]. In each case, the usefulness of the model depends on the derivation of the stochastic Euler equations that characterize the model's solution.…”

Section: Introductionmentioning

confidence: 99%

Solving Stochastic Money-in-the-Utility-Function Models

Nesmith

2005

SSRN Journal

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This paper analyzes the necessary and su¢ cient conditions for solving money-inthe-utility-function models when contemporaneous asset returns are uncertain. A unique solution to such models is shown to exist under certain measurability conditions. Stochastic Euler equations, whose existence is normally assumed in these models, are then formally derived. The regularity conditions are weak, and economically innocuous. The results apply to the broad range of discrete-time monetary and …nancial models that are special cases of the model used in this paper. The method is also applicable to other dynamic models that incorporate contemporaneous uncertainty.

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GMM Estimation of a Money-in-the-Utility-Function Model: The Implications of Functional Forms

Cited by 58 publications

References 0 publications

The Functional Form Of The Demand For Euro Area M1

The Functional Form Of The Demand For Euro Area M1

Currency substitution, seigniorage, and currency crises in interdependent economies

Solving Stochastic Money-in-the-Utility-Function Models

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