Long-Run Income and Interest Elasticities of Money Demand in the United States

35 Pages Posted: 3 Jul 2007 Last revised: 31 Mar 2022

See all articles by Dennis L. Hoffman

Dennis L. Hoffman

University of Texas at Arlington; National Bureau of Economic Research (NBER)

Robert Rasche

Michigan State University; National Bureau of Economic Research (NBER)

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

Hoffman, Dennis L. and Rasche, Robert, Long-Run Income and Interest Elasticities of Money Demand in the United States (April 1989). NBER Working Paper No. w2949, Available at SSRN: https://ssrn.com/abstract=461384

Dennis L. Hoffman (Contact Author)

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76013
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert Rasche

Michigan State University ( email )

East Lansing, MI 48824
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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