In search for stability: An empirical appraisal of the demand for money in the G7 and EC countries

Abstract

The demand for money has been at the centre of monetary econometrics. The demand for money research focuses on the factors determining money-holding behaviour of the private sector of the economy. Knowledge of this reaction pattern is of great importance for assessing the effectiveness of monetary policy or the impact of monetary or other shocks. However, views on this matter differ widely. On the one hand, there is a general approach, focusing on the monetary climate, which regards monetary ease or tightness as the main driving force without specifying the nature of the underlying transmission process. On the other hand, a more specific approach is discernible, which regards all changes in money-holding behaviour, or, in other words the reaUocation within the range of components of wealth, as the most important channel for spending effects.The demand for money is a well-explored field of monetary econometrics. Against that background and in view of the traditionally ample availability of data to examine the various theoretical views empirically, this is not surprising. Moreover, research on the demand for money conducted in the recent past has been an important source of inspiration for innovations in both monetary theory and econometric technique. This has resulted in an abundant flow of interesting empirical research on the demand for money covering many countries and regions. This survey aims at presenting an inventory and assessing these innovative activities from the viewpoint of monetary policy. It focuses on four aspects in particular. The first is the evolution of the theory of the demand for money, of which a brief survey is presented. The second is a summary of empirical studies carried out since 1970. Because virtually all recent surveys of money demand research -see e.g. , Goldfield and Sichel (1990) or Boughton (1992) -focus primarily on the US, the present survey, following Fase and Kun6 (1974, p. 344-345;1975) for the 1960s and before, broadens the perspective by including the G7 and EC countries in particular. The third aspect concerns the most important theoretical and methodological lessons to be

Wealth and the demand for money: Empirical evidence for the Netherlands and Belgium

“…The theoretical framework adopted to examine the impact of wealth on money demand is similar to that in Fase and Winder (1990, 1993, 1994. The starting point is a traditional demand for money relationship according to which desired money balances not only depend on familiar determinants such as real income, interest rates and inflation, but also on real wealth.…”

“…The reason for this is the reasonably well-developed theory of the demand for money, the ample availability of data required for estimation and the fact that knowledge of the stability of the demand for money is relevant for a monetary policy aimed at controlling money growth. This perhaps explains the emphasis on the stability issue rather than on the role of wealth in money demand research efforts (see also Fase, 1994). However, in this historical perspective the role of wealth is unarticulated and almost ignored in empirical research on money demand.…”

Stability of the demand for M1 and harmonized M3 in Finland

“…The present measure of M3H will probably not be the final measure. 2 Examples are Cuthbertson and Taylor (1990), Hendry and Ericsson (1991), Baba, Hendry and Starr (1992), Juselius (1996), Fase (1994), Wolters, Ter/isvirta and Liitkepohl (1998). 3 The cointegration estimation is done with CATS in RATS by Hansen and Juselius (1995) except for the small sample simulations, which are performed with Gauss utilizing the CIA code by Paolo Paruolo.…”

Estimating A European Demand For Money

“…Judging from the comparison of empirical studies of money demand in European countries (see Monticelli and Strauss-Kahn (1992) or Fase (1994)), we cannot a priori expect the aggregation bias to be negligible. This is a conclusion reached also by Wesche (1994), who uses a more formal empirical analysis to investigate the basis for aggregation of the four largest EU countries.…”

“…A useful summary of issues surrounding the estimation procedure and a survey of existing national money demand estimates for the EU are provided by Fase (1994), Monticelli and Strauss-Kahn (1992) and Browne, Fagan and Henry (1997). Fair (1987) gives an older but extensive comparison of money demand estimates involving 27 countries, including EU members.…”