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
Date Written: April 1, 2012
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: Suggested Citation