Skip to main content
SpringerLink
Log in

Stability of the demand for M1 and harmonized M3 in Finland

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

We derive a theoretical model for the demand for money using the adjustment cost augmented money-in-the-utility-function approach. The steady-state-utility function-parameters of the model of narrow money (M1) estimated with cointegration techniques are stable over the foreign exchange rate regime shift; whereas in the model of harmonized M3 (M3H) they arenot stable. The theoretical model fits the M1 data. The adjustment cost parameters of the M1 model describing the dynamics of the demand for money might indicate technological improvements in banking and payments during the sample period. These results suggest that from the Finnish point of view M1 would be a more appropriate intermediate target for monetary policy than harmonized M3.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Andrews DWK (1993) Test for parameter instability and structural change with unknown change point. Econometrica 61:821–856

    Google Scholar 

  • Andrews DWK, Fair RC (1988) Inference in nonlinear econometric models with structural change. Review of Economic Studies 55:615–640

    Google Scholar 

  • Baba Y, Hendry DF, Starr RM (1992) The demand for M1 in the U.S.A., 1960–1988. Review of Economic Studies 59:25–61

    Google Scholar 

  • Braun PA, Constantinides GM, Ferson WE (1993) Time nonseparability in aggregate consumption: International evidence. European Economic Review 37:897–920

    Google Scholar 

  • Browne FX, Fagan G, Henry J (1997) Money demand in EU countries; a survey. Staff paper 7/1997, European Monetary Institute

  • Croushore D (1993) Money in the utility function: Functional equivalence to a shopping time model. Journal of Macroeconomics 15:175–182

    Google Scholar 

  • Cuthbertson K, Taylor MP (1987) The demand for money: A dynamic rational expectations model. Economic Journal 97(Supplement):65–76

    Google Scholar 

  • Cuthbertson K, Taylor MP (1990) Money demand, expectations, and the forward-looking model. Journal of Policy Modeling 12(2):289–315

    Google Scholar 

  • den Haan WJ, Levin A (1996) A practioner's guide to robust covariance matrix estimation. Discussion Paper 96-17, University of California, San Diego to be appear in Handbook of Statistics 15 (Chapter 12, 291–341)

  • Dolado J, Galbraith JW, Banerjee A (1991) Estimating intertemporal quadratic adjustment cost models with integrated series. International Economic Review 32(4):919–936

    Google Scholar 

  • Dufour J-M, Ghysels E, Hall A (1994) Generalized predictive testst and structural change analysis in econometrics. International. Economic Review 35:199–229

    Google Scholar 

  • Eitrheim Ø (1991) Inference in small cointegrated systems, some Monte Carlo results. Working Paper 1991/9, Bank of Norway

  • EMI (1997) The single monetary policy in stage three: Elements of the monetary policy strategy of the ESCB. Report, European Monetary Institute, February

  • Fase MMG (1994) In search for stability; an empirical appraisal of the demand for money in the G7 and EC countries. De Economist 142(4):421–454

    Google Scholar 

  • Feenstra RC (1986) Functional equivalence between liquidity constraints and the utility of money. Journal of Monetary Economics 17:271–291

    Google Scholar 

  • Ghysels E, Hall A (1990a) Are consumption-based intertemporal capital asset pricing models structural. Journal of Econometrics 45:121–139

    Google Scholar 

  • — (1990b) A test for structural stability of Euler parameters estimated via the generalized method of moments estimator. International Economic Review 31:355–364

    Google Scholar 

  • Hamilton JD (1994) Time series analysis. Princeton University Press, Princeton, NJ

    Google Scholar 

  • Hansen H, Juselius K (1995) CATS in RATS. Estima, Evanston, Illinois

    Google Scholar 

  • Hansen LP (1982) Large sample properties of generalized method of moments estimator. Econometrica 50(4):1029–1054

    Google Scholar 

  • Hansen LP, Heaton J, Yaron A (1996) Finite-sample properties of some alternative GMM estimators. Journal of Business and Economic Statistics 14(3):262–280

    Google Scholar 

  • Haug AA (1996) Tests for cointegration: A Monte Carlo comparison. Journal of Econometrics 71(1&2):89–117

    Google Scholar 

  • Hendry DF, Ericsson NR (1991) Modelling the demand for narrow money in the United Kingdom and the United States. European Economic Review 35:833–886

    Google Scholar 

  • Hoffman D, Pagan A (1989) Post-sample prediction tests for generalized method of moments estimators. Oxford Bulletin of Economics and Statistics 51:331–343

    Google Scholar 

  • Johansen S (1988) Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control 12:231–254

    Google Scholar 

  • — (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59:1551–80

    Google Scholar 

  • — (1995) Likelihood-based inference in cointegrated vector autoregressive models Oxford University Press, Oxford

    Google Scholar 

  • Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration-with application to the demand for money. Oxford Bulletin of Economics and Statistics 52(2):169–210

    Google Scholar 

  • Juselius K (1996) An empirical analysis of the changing role of the german bundesbank after 1983. Oxford Bulletin of Economics and Statistics 58(4):791–819

    Google Scholar 

  • Lucas Jr RE (1988) Money demand in the United States: A quantitative review. Carnegie-Rochester Conference Series on Public Policy 29:137–168

    Google Scholar 

  • Newey WK, West K (1994) Automatic lag selection in covariance matrix estimation. Review of Economic Studies 61:631–653

    Google Scholar 

  • Ogaki M (1993) GMM: A user guide. Working Paper 348, University of Rochester

  • Oliner SD, Rudebusch GD, Sichel D (1996) The Lucas critique revisited: Assessing the stability of empirical Euler equations for investment. Journal of Econometrics 70:291–316

    Google Scholar 

  • Osterwald-Lenum M (1992) A note with quantiles of the asymptotic distribution of the maximum likelihood cointegration rank test statistics: four cases. Oxford Bulletin of Economics and Statistics 54(3):461–472

    Google Scholar 

  • Papi L, Monticelli C (1995) EU-wide money demand; an assessment of competing approaches. Quaderni di ricerca 63, Università degli Studi di Ancona; Dipartimento di economia

  • Poterba JM, Rotemberg JJ (1987) Money in the utility funciton: an empirical implementation. In: Barnett WA, Singleton KJ (eds.) New approaches to monetary economics, Cambridge University Press

  • Ripatti A (1994) Econometric modelling of the demand for money in Finland. D:79, Bank of Finland, Helsinki

    Google Scholar 

  • Roy A (1995) Multicountry comparison of the consumption based capital asset pricing model: Germany, Japan and USA. Discussion Paper 209, LSE Financial Markets Group, An ESERC Research Centre

  • Sill K (1995) Some empirical evidence on money demand from a cash-in-advance model. Working Paper 95-20, Federal Reserve Bank of Philadelphia

  • Tinsely PA (1993) Fitting both data and theories: Polynomial adjustment costs and error-correction decision rules. Finance and Economics Discussion Series 93-21, Federal Reserve Board

  • Toda HY (1995) Finite sample performance of likelihood ratio tests for cointegrating ranks in vector autoregressions. Econometric Theory 11,(5):1015–1033

    Google Scholar 

  • van Riet AG (1993) Studies of EC money demand: survey and assesment. Quarterly Bulletin, De Nederlansche Bank, pp. 63–77

  • Wolters J, Teräsvirta T, Lütkepohl H, (1998) Modelling the demand for M3 in the unified Germany. Forthcoming in Review of Economics and Statistics

Download references

Author information

Authors and Affiliations

  1. Bank of Finland, Box 160, FIN-00101, Helsinki, Finland

    Antti Ripatti

Authors
  1. Antti Ripatti
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

The views expressed are those of the author and not necessarily the views of the Bank of Finland. I thank Juha Tarkka, Jouko Vilmunen, Pekka Ilmakunnas, Erkki Koskela, Paolo Paruolo, Anders Rahbek, Pentti Saikkonen, Juha Seppälä, Matti Virén and the participants of ESEM96 meeting and ‘Money Demand in Europe’ conference (October 1997, Berlin) for useful comments and discussions and two anonymous referees and the editors for profound and constructive comments. The usual disclaimer applies. The data may be obtained from the internet, http://wotan.wiwi.hu-berlin.de/oekonometrie/engl/data.html

Rights and permissions

Reprints and permissions

About this article

Cite this article

Ripatti, A. Stability of the demand for M1 and harmonized M3 in Finland. Empirical Economics 23, 317–337 (1998). https://doi.org/10.1007/BF01294410

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF01294410

Key words

JEL classification

Search

Navigation