Long-Run Income and Interest Elasticities of Money Demand in the United States
35 Pages Posted: 3 Jul 2007 Last revised: 31 Mar 2022
Date Written: April 1989
Abstract
This study investigates the stability of long-run log-linear demand functions for narrowly defined monetary aggregates (M1, Monetary Base) in the U.S. during the post World War II period. The hypotheses that the individual time series which appear in such equations (real M1, real Monetary Base, real Personal Income and short-term and long-term nominal interest rates) all have unit roots cannot be rejected. The primary conclusion of this study is that with proper attention to the time series properties of the available data, there exists strong evidence in support of a stable equilibrium demand function for real balances in the post-World War II U.S. economy. The hypothesis of a unitary equilibrium real income elasticity (a velocity function) cannot be rejected. Further, the estimates of equilibrium interest elasticities are approximately -.5 to -.6 for real M1 and -.4 to -.5 for real monetary base. The estimated interest elasticities are significantly different statistically depending on whether long- term or short-term interest rates are used, but the observed differences in these estimates are not of economic significance.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Paper statistics
Recommended Papers
-
A Simple Mle of Cointegrating Vectors in Higher Order Integrated Systems
By James H. Stock and Mark W. Watson
-
Stochastic Trends and Economic Fluctuations
By Robert G. King, Charles I. Plosser, ...
-
On the Estimation and Inference of a Cointegrated Regression in Panel Data
By Chihwa Kao and Min-hsien Chiang
-
Interpreting Evidence on Money-Income Causality
By James H. Stock and Mark W. Watson
-
Do Equilibrium Real Business Cycle Theories Explain Post-War U.S. Business Cycles?
-
Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data
By Robert Litterman and Laurence Weiss
-
A Reappraisal of Recent Tests of the Permanent Income Hypothesis
-
The Power of Single Equation Tests for Cointegration When the Cointegrating Vector is Prespecified
By Eric Zivot