| Sumario: | A study was conducted to examine the demand for both M1, narrow money, and M3, broad money, in Mexico and the presence of a portfolio balance effect for Mexico in the period 1978-90. Quarterly data were analyzed, and economic theory and cointegration were used as a guide to choosing appropriate independent variables. In light of potential difficulties in applying the full system cointegration approach in finite samples, however, the study relied more heavily on the general-to-specific and error correction methodology in a single-equation framework. Findings revealed the existence of economically sensible demand for money equations for M1 and M3 that depend on income, an opportunity cost interest rate and a measure of the return to substitution between domestic and foreign assets. In addition, stable demand functions were found even when data for the “crisis period” of the 1980s were included. It is argued that the authorities must take into account the impact of changes in the dollar-peso exchange rate to interpret movements in peso monetary aggregates correctly.
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