On the Functional Forms and Stability of Money Demand: The U.S., Japan and Australia

Lim, S., Khun, C, & Sum, V. (2012). On the functional forms and stability of money demand: The U.S., Japan and Australia. Research in Business and Economics Journal, 6, 150-168.

27 Pages Posted: 3 Apr 2012 Last revised: 25 Sep 2012

Sokchea Lim

Southern Illinois University Carbondale

Channary Khun

Southern Illinois University at Carbondale

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Date Written: April 1, 2012

Abstract

We find strong evidence for the stability of money demand of a semi-log form for the U.S., a log-log form for Japan and a semi-log form for Australia. This implies that there could be no finite satiation on the money demand curve as the nominal interest rate approaches zero and continue to stay near zero for a long period of time. The results support Friedman’s (1969) zero nominal interest rate rule. We also estimate the welfare cost of inflation using the functions derived by Lucas (2000) from Bailey’s (1956) definition of the welfare cost.

Keywords: Money Demand, Cointegration, Welfare Cost of Inflation

JEL Classification: E41

Suggested Citation

Lim, Sokchea and Khun, Channary and Sum, Vichet, On the Functional Forms and Stability of Money Demand: The U.S., Japan and Australia (April 1, 2012). Lim, S., Khun, C, & Sum, V. (2012). On the functional forms and stability of money demand: The U.S., Japan and Australia. Research in Business and Economics Journal, 6, 150-168.. Available at SSRN: https://ssrn.com/abstract=2032761 or http://dx.doi.org/10.2139/ssrn.2032761

Sokchea Lim

Southern Illinois University Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

HOME PAGE: http://www.siu.edu

Channary Khun

Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

HOME PAGE: http://www.siu.edu

Vichet Sum (Contact Author)

University of Maryland Eastern Shore - School of Business and Technology ( email )

Kiah Hall 1114
Princess Anne, MD 21853
United States
410-651-6531 (Phone)
410-651-6529 (Fax)

HOME PAGE: http://vichetsum.com

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