Abstract
This paper examines several central issues in the empirical modeling of money demand. These issues include economic theory, data measurement, parameter constancy, the opportunity cost of holding money, cointegration, model specification, exogeneity, and inferences for policy. Review of these issues at a general level is paralleled by discussion of specific empirical applications, including some new results on the demand for narrow money in the United Kingdom.
Similar content being viewed by others
References
Ahumada H (1992) A dynamic model of the demand for currency: Argentina 1977–1988. Journal of Policy Modeling 14, 3:335–361
Baba Y, Hendry DF, Starr RM (1992) The demand for M1 in the U.S.A., 1960–1988. Review of Economic Studies 59, 1:25–61
Banerjee A, Dolado JJ, Galbraith JW, Hendry DF (1993) Co-integration, error correction, and the econometric analysis of non-stationary data. Oxford University Press, Oxford
Banerjee A, Dolado JJ, Hendry DF, Smith GW (1986) Exploring equilibrium relationships in econometrics through static models: Some Monte Carlo evidence. Oxford Bulletin of Economics and Statistics 48, 3:253–277
Banerjee A, Hendry DF (eds.) (1992) Testing integration and cointegration. Special Issue, Oxford Bulletin of Economics and Statistics 54, 3: August
Bårdsen G (1992) Dynamic modeling of the demand for narrow money in Norway. Journal of Policy Modeling 14, 3:363–393
Barnett WA (1980) Economic monetary aggregates: An application of index number and aggregation theory. Journal of Econometrics 14, 1:11–48
Coghlan RT (1978) A transactions demand for money. Bank of England Quarterly Bulletin 18, 1:48–60
Cuthbertson K (1988) The demand for M1: A forward looking buffer stock model. Oxford Economic Papers 40, 1:110–131
Davidson JEH (1987) Disequilibrium money: Some further results with a monetary model of the UK. Chapter 6 in: Goodhart CAE, Currie D, Llewellyn DT (eds.) The operation and regulation of financial markets, Macmillan, London, pp. 125–149
Dickey DA, Fuller WA (1981) Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica 49, 4:1057–1072
Doornik JA, Hendry DF (1996) PcGive professional 9.0 for Windows. International Thomson Business Press, London
Dufour J-M (1982) Recursive stability analysis of linear regression relationships: An exploratory methodology. Journal of Econometrics 19, 1:31–76
Engle RF, Granger CWJ (1987) Co-integration and error correction: Representation, estimation, and testing. Econometrica 55, 2:251–276
Engle RF, Granger CWJ (eds.) (1991) Long-run economic relationships: Readings in cointegration, Oxford University Press, Oxford
Engle RF, Hendry DF (1993) Testing super exogeneity and invariance in regression models. Journal of Econometrics 56, 1/2:119–139
Engle RF, Hendry DF, Richard J-F (1983) Exogeneity. Econometrica 51, 2:277–304
Ericsson NR (ed.) (1992a) Cointegration, exogeneity, and policy analysis. Special Issues, Journal of Policy Modeling 14, 3 and 4: June and August
Ericsson NR (1992b) Cointegration, exogeneity, and policy analysis: An overview. Journal of Policy Modeling 14, 3:251–280
Ericsson NR (1998) Empirical modeling of money demand. International Finance Discussion Paper, Board of Governors of the Federal Reserve System, Washington, D.C., available on the WorldWide Web at www.bog.frb.fed.us/pubs/ifdp/1998/
Ericsson NR, Campos J, Tran H-A (1990) PC-GIVE and David Hendry's econometric methodology. Revista de Econometria 10, 1:7–117
Ericsson NR, Hendry DF, Prestwich KM (1998) The demand for broad money in the United Kingdom, 1878–1993. Scandinavian Journal of Economics 100, 1:289–324
Ericsson NR, Hendry DF, Tran H-A (1994) Cointegration, seasonality, encompassing, and the demand for money in the United Kingdom. Chapter 7 in Hargreaves CP (ed.) Nostationary time series analysis and cointegration, Oxford University Press, Oxford, pp. 179–224
Ericsson NR, Irons JS (1995) The Lucas critique in practice: Theory without measurement. Chapter 8 in Hoover KD (ed.) Macroeconometrics: Developments, tensions and prospects, Kluwer Academic Publishers, Boston, Massachusetts, pp. 263–312 (with discussion)
Ericsson NR, Sharma S (1998) Broad money demand and financial liberalization in Greece. Empirical Economics 23:417–436
Friedman M, Schwartz AJ (1982) Monetary trends in the United States and the United Kingdom: Their relation to income, prices, and interest rates, 1867–1975. University of Chicago Press, Chicago
Goldfeld SM (1973) The demand for money revisited. Brookings Papers on Ecomomic Activity 1973, 3:577–638 (with discussion)
Goldfeld SM (1976) The case of the missing money. Brookings Papers on Economic Activity 1976, 3:683–730 (with discussion)
Goldfeld SM, Sichel DE (1990) The demand for money, Chapter 8 in Friedman BM, Hahn FH (eds.) Handbook of monetary economics, Volume 1, North-Holland, Amsterdam, pp. 299–356
Goodhart CAE (1989) The conduct of monetary policy. Economic Journal 99, 396:293–346
Granger CWJ (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37, 3:424–438
Hacche G (1974) The demand for money in the United Kingdom: Experience since 1971. Bank of England Quarterly Bulletin 14, 3:284–305
Hallman JJ, Porter RD, Small DH (1991) Is the price level tied to the M2 monetary aggregate in the long run? American Economic Review 81, 4:841–858
Hendry DF (1979) Predictive failure and econometric modelling in macroeconomics: The transactions demand for money. Chapter 9 in Ormerod P (ed.) Economic modelling: Current issues and problems in macroeconomic modelling in the UK and the US, Heinemann Education Books, London, pp. 217–242
Hendry DF (1985) Monetary economic myth and econometric reality. Oxford Review of Economic Policy 1, 1:72–84
Hendry DF (1988) The encompassing implications of feedback versus feedforward mechanisms in econometrics. Oxford Economic Papers 40, 1:132–149
Hendry DF (1992) An econometric analysis of TV advertising expenditure in the United Kingdom. Journal of Policy Modeling 14, 3:281–311
Hendry DF (1993) Econometrics: Alchemy or science? Blackwell Publishers, Oxford
Hendry DF (1995) Dynamic econometrics. Oxford University Press, Oxford
Hendry DF, Doornik JA (1994) Modelling linear dynamic econometric systems. Scottish Journal of Political Economy 41, 1:1–33
Hendry DF, Ericsson NR (1991a) An econometric analysis of U.K. money demand in “Monetary trends in the United States and the United Kingdom’ by Milton Friedman and Anna J Schwartz. American Economic Review 81, 1:8–38
Hendry DF, Ericsson NR (1991b) Modeling the demand for narrow money in the United Kingdom and the United States. European Economic Review 35, 4:833–881 (with discussion)
Hendry DF, Mizon GE (1978) Serial correlation as a convenient simplification, not a nuisance: A comment on a study of the demand for money by the Bank of England. Economic Journal 88, 351:549–563
Hendry DF, Mizon GE (1993) Evaluating dynamic econometric models by encompassing the VAR. Chapter 18 in Phillips PCB (ed.) Models, methods, and applications of econometrics: Essays in honor of A. R. Bergstrom, Blackwell Publishers, Cambridge, Massachusetts, pp. 272–300
Hendry DF, Pagan AR, Sargan JD (1984) Dynamic specification. Chapter 18 in Grilichez Z, Intriligator MD (eds.) Handbook of econometrics, Volum 2, North-Holland, Amsterdam, pp. 1023–1100
Hendry DF, Richard J-F (1982) On the formulation of empirical models in dynamic econometrics. Journal of Econometrics 20, 1:3–33
Hoffman DL, Rasche RH (1996) Aggregate money demand functions: Empirical applications in cointegrated systems. Kluwer Academic Publishers, Boston, Massachusetts
Hylleberg S (ed.) (1992) Modelling seasonality. Oxford University Press, Oxford
Johansen S (1988) Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control 12, 2/3:231–254
Johansen S (1992) Testing weak exogeneity and the order of cointegration in UK money demand data. Journal of Policy Modeling 14, 3:313–334
Johansen S (1995) Likelihood-based inference in cointegrated vector autoregressive models. Oxford University Press, Oxford
Judd JP, Scadding JL (1982) The search for a stable money,demand function: A survey of the post-1973 literature. Journal of Economic Literature 20, 3:993–1023
Juselius K, Hargreaves CP (1992) Long-run relations in Australian monetary data. Chapter 10 in Hargreaves CP (ed.) Macroeconomic modelling in the long run, Edward Elgar, Aldershot, Hants., England, 249–285
Kamin SB, Ericsson NR (1993) Dollarization in Argentina. International Finance Discussion Paper No. 460, Board of Governors of the Federal Reserve System, Washington, D.C., November
Kremers JJM, Ericsson NR, Dolado JJ (1992) The power of cointegration tests. Oxford Bulletin of Economics and Statistics 54, 3:325–348
Laidler DEW (1993) The demand for money: Theories, evidence, and problems. Fourth Edition, HarperCollins College Publishers, New York
Lucas Jr RE (1976) Econometric policy evaluation: A critique. In Brunner K, Meltzer AH (eds.) The Phillips curve and labor markets, North-Holland, Amsterdam, Carnegie-Rechester Conference Series on Public Policy, Volume 1, Journal of Monetary Economics, Supplement, 19–46 (with discussion)
MacDonald R, Taylor MP (1992) A stable US money demand function, 1874–1975. Economics Letters 39, 2:191–198
Mizon GE, Richard J-F (1986) The encompassing principle and its application to testing nonnested hypotheses. Econometrica 54, 3:657–678
Moore GR, Porter RD, Small DH (1990) Modeling the disaggregated demands for M2 and M1: The U.S. experience in the 1980s. In Hooper P, Johnson KH, Kohn DL, Lindsey DE, Porter RD, Tryon R (eds.) Financial sectors in open economies: Empirical analysis and policy issues, Board of Governors of the Federal Reserve System, Washington, D.C., pp. 21–105 (with discussion)
Osterwald-Lenum M (1992) A note with quantiles of the asymptotic distribution of the maximum likelihood cointegration rank test statistics. Oxford Bulletin of Economics and Statistics 54, 3:461–472
Phillips AW (1954) Stabilisation policy in a closed economy. Economic Journal 64, 254:290–323
Phillips PCB (1991) Optimal inference in cointegrated systems. Econometrica 59, 2:283–306
Rose AK (1985) An alternative approach to the American demand for money. Journal of Money, Credit, and Banking 17, 4, Part 1:439–455
Wolters J, Teräsvirta T, Lütkepohl H (1998) Modelling the demand for M3 in the unified Germany. Review of Economics and Statistics, forthcoming
Author information
Authors and Affiliations
Additional information
The author is a staff economist in the Division of International Finance, Board of Governors of the Federal Reserve System, Washington, DC 20551 USA, and may be reached on the Internet at ericsson@frb.gov. The views in this paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, the Reserve Bank of Australia, or any other person associated with the Federal Reserve System or the Reserve Bank of Australia. I am grateful for the generous hospitality of the Reserve Bank of Australia, where I was on secondment when this research was begun. I also wish to thank Tony Brennan, Gordon de Brouwer, Julia Campos, Ed Nelson, Jerome Fahrer, Jon Faust, Steve Grenville, David Hendry, John Irons, Katarina Juselius, Neva Kerbeshian, Helmut Lütkepohl, Dieter Nautz, Athanasios Orphanides, Kevin Prestwich, Robert Subbaraman, Timo Teräsvirta, Jenny Wilkinson, Jürgen Wolters, and two anonymous referees for helpful comments and discussions. All numerical results were obtained using PcGive Professional Version 9.0; see Doornik and Hendry (1996). This paper is a condensed version of Ericsson (1998), which provides additional empirical and analytical examples and more extensive references. The data may be obtained from the Internet at http://wotan.wiwi.hu-berlin.de/oekonometrie/engl/data.html.
Rights and permissions
About this article
Cite this article
Ericsson, N.R. Empirical modeling of money demand. Empirical Economics 23, 295–315 (1998). https://doi.org/10.1007/BF01294409
Issue Date:
DOI: https://doi.org/10.1007/BF01294409