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A Stable Money Demand Function

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  • MICHAEL J. HAMBURGER

Abstract

Especially for monetarists–but for nonmonetarists as well– the demand function for money is of crucial importance for understanding macroeconomic activity and for making policy prescriptions. However, recent relationships between the money supply and aggregrate spending have generated increasing skepticism regarding the stability of money demand and the merits of using monetary aggregates as the bases for monetary policy. The author has formulated a demand for money function similar to so‐called “conventional” models in most respects. But its specification differs from these other models in two important ways– the choice of interest rates and the determination of real income elasticity. Using his specification, the author finds that money demand continues to be highly stable and argues that the case for basing policy and setting targets in terms of Ml is as strong as ever. He concludes that the close correspondence between actual and predicted velocity implies that the recent high growth rate of Ml is not inflationary but merely has accommodated a comparable increase in money demand.

Suggested Citation

  • Michael J. Hamburger, 1987. "A Stable Money Demand Function," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 34-40, January.
    • Handle: RePEc:bla:coecpo:v:5:y:1987:i:1:p:34-40
    DOI: 10.1111/j.1465-7287.1987.tb00242.x
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    References listed on IDEAS

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    1. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29, National Bureau of Economic Research, Inc.
    2. Michael J. Hamburger, 1966. "The Demand for Money by Households, Money Substitutes, and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 74(6), pages 600-600.
    3. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71(3), pages 219-219.
    4. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    5. Roley, V Vance, 1985. "Money Demand Predictability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 611-641, November.
    6. Judd, John P & Scadding, John L, 1982. "The Search for a Stable Money Demand Function: A Survey of the Post-1973 Literature," Journal of Economic Literature, American Economic Association, vol. 20(3), pages 993-1023, September.
    7. Karl Brunner & Allan H. Meltzer, 1964. "Some Further Investigations Of Demand And Supply Functions For Money," Journal of Finance, American Finance Association, vol. 19(2), pages 240-283, May.
    8. V. Vance Roley, 1985. "Money Demand Predictability," NBER Working Papers 1580, National Bureau of Economic Research, Inc.
    9. John P. Judd & John L. Scadding, 1982. "The search for a stable money demand function: a survey of the post- 1973 literature," Working Papers in Applied Economic Theory 109, Federal Reserve Bank of San Francisco.
    10. Hamburger, Michael J., 1977. "The demand for money in an open economy : Germany and the United Kingdom," Journal of Monetary Economics, Elsevier, vol. 3(1), pages 25-40, January.
    11. Karl Brunner & Allan H. Meltzer, 1963. "Predicting Velocity: Implications For Theory And Policy," Journal of Finance, American Finance Association, vol. 18(2), pages 319-354, May.
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    13. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
    14. Hamburger, Michael J., 1977. "Behavior of the money stock : Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 265-288, July.
    15. Michael J. Hamburger, 1983. "Recent velocity behavior, the demand for money and monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Dec, pages 108-128.
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    Cited by:

    1. Choudhry, Taufiq, 1996. "Real stock prices and the long-run money demand function: evidence from Canada and the USA," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 1-17, February.
    2. Michael R. Darby & William Poole & David E. Lindsey & Milton Friedman & Michael J. Bazdarich, 1987. "Recent Behavior Of The Velocity Of Money," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 1-33, January.
    3. Charles E. Hegji, 1989. "FOMC Targets, Base Drift and Inflationary Expectations," Eastern Economic Journal, Eastern Economic Association, vol. 15(1), pages 45-54, Jan-Mar.

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