Atlantic Economic Journal

, Volume 25, Issue 2, pp 155–163 | Cite as

Financial innovations and the interest elasticity of money demand: Evidence from an error correction model

  • Masoud Moghaddam


The difficulty of estimating a stable money demand function has been blamed on financial innovations of the past two decades. Gurley and Shaw's [1960] thesis implies that a proliferation of money-like assets resulting from financial innovations increased the interest elasticity of money demand. However, Hafer and Hein [1984] provided empirical evidence to the contrary. This paper presents the empirical results of the M2 demand for money using an error correction model for the period 1959:1–87:4 and two subperiods 1959:1–73:4 and 1974:1–87:4. The findings suggest lower interest and price elasticities for money demand in the second sample in which money substitutes proliferated.


Empirical Evidence Empirical Result International Economic Public Finance Error Correction 
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Copyright information

© International Atlantic Economic Society 1997

Authors and Affiliations

  • Masoud Moghaddam
    • 1
  1. 1.St. Cloud State UniversityUSA

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