Does interest rate volatility affect the US M1 demand function? Evidence from cointegration.
A study was conducted to examine the long-run demand for U.S. real M1 in the post Second World War period (1954-96) in an effort to determine whether interest rate volatility affects the U.S. M1 demand function. The empirical investigation was undertaken using Johansen multivariate cointegration te...
| Published in: | Manchester School (14636786) Vol. 67; no. 6; pp. 621 - 649 |
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| Format: | Article |
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Wiley-Blackwell
December 1999
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| Online Access: | View this record in EBSCOhost |
| Summary: | A study was conducted to examine the long-run demand for U.S. real M1 in the post Second World War period (1954-96) in an effort to determine whether interest rate volatility affects the U.S. M1 demand function. The empirical investigation was undertaken using Johansen multivariate cointegration tests and error correction models. Findings indicated that a stationary long-run M1 demand function is only found when the interest rate volatility or the inflation rate volatility is included in the function. The conditional variance estimate from the GARCH model was used as volatility in the empirical work. Findings from the error correction models demonstrated causality between real M1 and its determinants, including interest rate—and inflation rate—volatility. It was suggested that a significant presence of interest rate volatility in the money demand function might influence economic performance and monetary policy. |
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