| Sumario: | The purpose of this paper is to investigate the monetary aggregate which is relevant for a stable demand function for the household sector. Since the stability of the demand for money function is the central behavioral relationship in the monetarist model,[1] the evidence provided here will have important bearing on this issue. Additionally, the household sector is the largest holder of currency and commercial bank deposits, and as such is an essential link in the transmission mechanism of monetary policy. <BR> The major conclusions of the paper are: (a) that the demand functions for money with money, MI, defined to include currency plus demand deposits held by the household sector, are unstable; (b) that a stable demand function does exist if MI is replaced by M2 (M1 + commercial bank time deposits); and (c) broadening the definition of money to include the savings and loan shares or savings deposits in mutual savings banks does not add anything substantive to the issue of stability. <BR> The plan of this paper is as follows. Section II deals with the specification of the demand for money function for the household sector. Section III contains the empirical results and the conclusions. <BR> In concluding, it should be pointed out that the stability tests provide evidence beating on the issue of the appropriate definition of money for the household sector. The statistical results show that the appropriate definition of money is M2. Further broadening the definition to include savings and loan shares and mutual savings banks deposits, M3, provides mixed results. The coefficients of the variables based on equation (3) (which includes lagged adjustment variable) with the M3 definition are statistically significant. This is in line with the published research [13]. However, none of the equations exhibit stability. Thus, the statistical evidence provided here tends to favor the choice of the M2 definition of money.
|
|---|