## The Demand for Money: Theoretical and Empirical ApproachesAlmost half a century has elapsed since the demand for money began to attract widespread attention from economists and econometricians, and it has been a topic of ongoing controversy and research ever since. Interest in the topic stemmed from three principal sources. Firstofall,therewasthematter oftheinternaldynamicsofmacr- conomics, to which Harry Johnson drew attention in his 1971 Ely Lecture on “The Keynesian Revolution and the Monetarist Counter- Revolution,” American Economic Review 61 (May 1971). The main lesson about money that had been drawn from the so-called “Key- sian Revolution” was — rightly or wrongly — that it didn’t matter all that much. The inherited wisdom that undergraduates absorbed in the 1950s was that macroeconomics was above all about the determination of income and employment, that the critical factors here were saving and investment decisions, and that monetary factors, to the extent that they mattered at all, only had an in?uence on these all important variables through a rather narrow range of market interest rates. C- ventional wisdom never goes unchallenged in economics, except where its creators manage to control access to graduate schools and the jo- nals,anditiswithnocynicalintentthatIcon?rmJohnson’ssuggestion that those of us who embarked on academic careers in the ’60s found in this wisdom a ready-made target. |

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### Contents

141 CrossCountry Data | 186 |

143 CrossCountry Evidence | 190 |

144 Robustness | 195 |

145 Conclusion | 196 |

Microfoundations and Monetary Aggregation | 197 |

The Microeconomic Foundations of the Deﬁnition of Money | 198 |

151 The SimpleSum Index | 200 |

152 The User Cost of Money | 201 |

16 | |

17 | |

21 | |

23 | |

Dynamic Monetary Macroeconomics | 25 |

Models with Rational Expectations | 27 |

31 The Cagan Model | 28 |

32 Adaptive Expectations | 29 |

33 Rational Expectations | 30 |

331 Application to the Cagan Model | 31 |

34 The Lucas Critique | 33 |

35 Rules versus Discretion | 38 |

351 Rules | 39 |

352 Discretion | 40 |

37 Inﬂation Mitigation | 42 |

Neoclassical Growth Theory | 44 |

411 Steady State ν τ 0 | 47 |

412 Steady State Growth ν 0 and τ 0 | 49 |

413 Steady State per Capita Growth ν 0 and τ 0 | 50 |

421 The Method of Lagrange Multipliers | 52 |

422 The Method of Dynamic Programming | 53 |

423 The Euler Equation | 55 |

44 Conclusion | 60 |

Monetary Growth Theory | 63 |

51 The Tobin Model | 64 |

52 The Sidrauski Model | 68 |

53 A Variation of the Sidrauski Model | 70 |

54 The New Empirics of Monetary Growth | 72 |

55 Conclusion | 73 |

The Welfare Cost of Inﬂation | 75 |

62 The Consumer Surplus Approach | 76 |

63 The Compensating Variation Approach | 78 |

64 Empirical Evidence | 82 |

65 Conclusion | 84 |

Theoretical Approaches to the Demand for Money | 86 |

The Classics Keynes and Friedman | 89 |

71 The Equation of Exchange | 90 |

73 The Quantity Theory Demand for Money | 91 |

74 The Cambridge Cash Balance Equation | 92 |

75 The Keynesian Approach | 93 |

76 Friedmans Modern Quantity Theory | 96 |

77 Conclusion | 99 |

Transactions Theories of Money Demand | 101 |

82 The ShoppingTime Model | 104 |

83 CashinAdvance Models | 107 |

84 Conclusion | 111 |

Portfolio Theories of Money Demand | 113 |

92 Money and Overlapping Generations | 116 |

93 Conclusion | 120 |

Empirical Approaches to the Demand for Money | 122 |

Conventional Demand for Money Functions | 125 |

101 The Basic Speciﬁcation | 126 |

1012 Scale Variables | 128 |

1013 Opportunity Costs | 131 |

103 Money Demand Dynamics | 134 |

104 FirstDifference Speciﬁcations | 136 |

105 Conclusion | 138 |

Modeling Trends in the Variables of the Money Demand Function | 139 |

111 Deterministic and Stochastic Trends | 140 |

112 Testing for Unit Roots | 142 |

1122 Augmented DickeyFuller ADF Tests | 143 |

1123 Breaking Trend Functions | 145 |

113 Testing for Stationarity | 146 |

114 Fractional Integration | 147 |

115 Testing for Nonlinearity and Chaos | 148 |

116 Detecting Signatures of SelfOrganization | 154 |

117 Conclusion | 156 |

Cointegration and the Aggregate Demand for Money Function | 157 |

121 Cointegration | 158 |

123 Cointegration and Common Cycles | 160 |

124 Cointegration and Codependent Cycles | 161 |

125 Cointegration and Error Correction | 162 |

126 Cointegration and Money Demand | 163 |

127 Testing for Cointegration | 165 |

1272 The Johansen ML Approach | 167 |

128 A Bounds Testing Approach | 170 |

129 Conclusion | 173 |

Balanced Growth the Demand for Money and Monetary Aggregation | 175 |

131 Theoretical Background | 176 |

132 Univariate Tests for Unit Roots | 177 |

133 Testing the c i y System | 178 |

134 Testing the m p y R System | 180 |

135 Testing the c i m p y R System | 181 |

CrossCountry Evidence on the Demand for Money | 185 |

153 Microeconomic Foundations | 203 |

154 Aggregation Theory | 205 |

155 Index Number Theory | 207 |

156 Diewerts Link | 209 |

157 Conclusion | 211 |

The New Monetary Aggregates | 213 |

161 The Neoclassical Monetary Problem | 214 |

162 Understanding the Divisia Aggregates | 215 |

163 Divisia Second Moments | 217 |

164 Measurement Matters | 218 |

165 The MQ and CE Indexes | 219 |

166 Empirical Comparisons | 221 |

167 Conclusion | 230 |

Nominal Stylized Facts | 231 |

171 The Hodrick and Prescott Filter | 232 |

172 The Cyclical Behavior of Money | 233 |

173 Prices Interest Rates and Velocity | 236 |

174 Robustness | 240 |

1742 The Christiano and Fitzerland Filter | 241 |

175 Conclusion | 242 |

Microfoundations and the Demand for Money | 243 |

The Nonparametric Approach to Demand Analysis | 244 |

181 The Idea of Revealed Preference | 246 |

182 The Maximization Hypothesis | 247 |

184 Direct Separability | 248 |

185 Indirect Separability | 251 |

186 Homothetic Separability | 253 |

187 NONPAR Tests of Consumer Behavior | 254 |

188 Conclusion | 255 |

The Parametric Approach to the Demand for Monetary Assets | 257 |

192 The Indirect Utility Approach | 259 |

193 The Slutsky Conditions | 262 |

1932 AddingUp Summability | 264 |

1933 Symmetry of the Slutsky Matrix | 265 |

1934 Negativity of the Own Substitution Effect | 267 |

194 Conclusion | 268 |

Locally Flexible Functional Forms and Demand Systems | 269 |

201 Locally Flexible Forms | 270 |

2012 The Basic Translog | 271 |

2013 The Almost Ideal Demand System | 272 |

202 Eﬀectively Globally Regular Forms | 273 |

2022 The NQ Reciprocal Indirect Utility Function | 275 |

203 Imposing Local Curvature | 276 |

2031 The Generalized Leontief and Local Curvature | 277 |

2032 The Basic Translog and Local Curvature | 279 |

2033 The Almost Ideal Demand System and Local Curvature | 280 |

2034 The Minﬂex Laurent and Local Curvature | 281 |

204 Conclusion | 282 |

Globally Flexible Functional Forms and Demand Systems | 285 |

211 The Fourier Model | 286 |

212 The AIM Model | 288 |

2121 The AIM1 Model | 289 |

2122 The AIM2 Model | 290 |

2123 The AIM3 Model | 292 |

213 Computational Considerations | 294 |

214 Imposing Curvature Restrictions | 295 |

215 Conclusion | 297 |

Microeconometrics and the Demand for Money | 298 |

The Econometrics of Demand Systems | 301 |

221 Dimension Reduction | 302 |

222 Duality and Functional Structure | 304 |

223 Stochastic Speciﬁcation | 305 |

224 Autoregressive Disturbances | 307 |

225 Theoretical Regularity | 309 |

226 Econometric Regularity | 310 |

227 Expenditure and Price Elasticities | 311 |

229 Conclusion | 313 |

Applied Monetary Demand Analysis | 314 |

231 The Monetary Problem | 316 |

232 The Basic Translog and the Demand for Money | 317 |

2321 Data and Econometric Issues | 319 |

2323 Regularity Effects of Serial Correlation Correction | 321 |

233 The AIM2 Model and the Demand for Money | 322 |

2331 AIM2 Income and Price Elasticities | 324 |

2332 AIM2 Elasticities of Substitution | 325 |

234 Conclusion | 329 |

Future Research Agenda | 331 |

241 Outstanding Credit | 332 |

244 Risk Matters | 335 |

245 Conclusion | 340 |

References | 341 |

366 | |

371 | |

### Other editions - View all

The Demand for Money: Theoretical and Empirical Approaches Apostolos Serletis No preview available - 2001 |

### Common terms and phrases

AD-AS Model adaptive expectations approach argued assume assumption Barnett capital Chapter coefficient cointegrating cointegrating vectors components consumption cost of inflation curvature demand for money demand system denotes discussed Divisia index Divisia monetary aggregates dynamic econometric economic agents elasticities of substitution empirical equilibrium estimation example exogenous filter flexible functional forms growth rate homothetic implies income index number indirect utility function inflation rate Keynesian kt+1 linear long-run Lyapunov exponent macroeconomic marginal matrix maximization monetary aggregates monetary assets monetary policy monetary services money demand function nominal interest rate null hypothesis optimal output overlapping generations model parameters period price level problem quantity theory rate of return rational expectation real money balances regression Serletis share equations simple-sum stationary statistical theoretical tion transactions translog unit root user costs variables weakly separable welfare cost zero