A Closer Look at Long-run U.S. Money Demand: Linear or Nonlinear Error-Correction with M0, M1, or M2?

We study annual U. S. data from 1869 or 1900 to 1999. We find evidence for a well-specified and stable model of money demand with data from 1946 to 1999. We carry out diagnostic and stability tests, including linearity tests. A linear error-correction model with the monetary base performs better tha...

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Bibliographic Details
Published in:	Economic Inquiry Vol. 45; no. 2; pp. 363 - 377
Main Authors:	Haug, Alfred A., Tam, Julie
Format:	Article
Published:	Wiley-Blackwell April 2007
Subjects:	Demand for money Mathematical models of economics History of money
Online Access:	View this record in EBSCOhost

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Summary:	We study annual U. S. data from 1869 or 1900 to 1999. We find evidence for a well-specified and stable model of money demand with data from 1946 to 1999. We carry out diagnostic and stability tests, including linearity tests. A linear error-correction model with the monetary base performs better than a model with Ml. A specification with M2 is not supported. We use real gross national product as the scale variable and a short-term interest rate as the opportunity cost measure. We estimate an income elasticity of 0.86 and an interest rate elasticity of-0.44 for the monetary base (JEL E41) Reprinted by permission of the publisher.