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The role of capital flows in the adjustment of money demand: The case of Finland

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Abstract

The paper models the dual role of money balances as a short-run buffer stock and an asset with a well-specified long-run demand function. The analysis is carried out in an open economy framework. Consequently, there will be an offset to monetary policy in the form of induced capital movements, but in our model, it will be distributed over time even under perfect substitutability of financial claims. Estimates for the parameters of the demand for money function are obtained from a capital flow equation using both unrestricted (OLS) and restricted (nonlinear) estimation methods. The results provide strong evidence in favour of the shock-absorption theory for the adjustment of money demand under money supply changes.

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Authors and Affiliations

  1. Dept. of Economics, University of Helsinki, Aleksanterinkatu 7, SF-00100, Helsinki 10

    V. Kanniainen

  2. Research Department, Bank of Finland, SF-00100, Helsinki

    J. Tarkka

Authors
  1. V. Kanniainen
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  2. J. Tarkka
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Additional information

We are indebted to an anonymous referee for helpful comments. Financial support from the Research Foundation of the Co-operative Banks is gratefully acknowledged.

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Kanniainen, V., Tarkka, J. The role of capital flows in the adjustment of money demand: The case of Finland. Empirical Economics 9, 75–85 (1984). https://doi.org/10.1007/BF01969388

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  • DOI: https://doi.org/10.1007/BF01969388

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