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Does Interest Rate Volatility Affect the US M1 Demand Function? Evidence from Cointegration

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  • Choudhry, Taufiq

Abstract

The long-run demand for US real M1 in the post Second World War period (1954-96) is investigated. The empirical investigation is conducted by means of Johansen multivariate cointegration tests and error correction models. Results show 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(1, 1) model is used as volatility in the empirical work. Results from the error correction models indicate causality between real M1 and its determinants, including interest rate (and inflation rate) volatility. A significant presence of interest rate volatility in the money demand function may affect economic performance and monetary policy. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Choudhry, Taufiq, 1999. "Does Interest Rate Volatility Affect the US M1 Demand Function? Evidence from Cointegration," Manchester School, University of Manchester, vol. 67(6), pages 621-648, December.
    • Handle: RePEc:bla:manchs:v:67:y:1999:i:6:p:621-48
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    Cited by:

    1. Kauko, Karlo, 2005. "The demand for money market mutual funds," Bank of Finland Research Discussion Papers 14/2005, Bank of Finland.
    2. Arize, A. C. & Malindretos, John & Grivoyannis, Elias C., 2005. "Inflation-rate volatility and money demand: Evidence from less developed countries," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 57-80.
    3. Lee, Chien-Chiang & Chen, Pei-Fen & Chang, Chun-Ping, 2007. "Testing linearity in a cointegrating STR model for the money demand function: International evidence from G-7 countries," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 76(4), pages 293-302.
    4. repec:zbw:bofrdp:2005_014 is not listed on IDEAS
    5. Rakesh Bissoondeeal & Michail Karoglou & Andy Mullineux, 2014. "Breaks in the UK Household Sector Money Demand Function," Manchester School, University of Manchester, vol. 82, pages 47-68, December.
    6. Taufiq Choudhry, 2010. "Does Interest Rate Volatility Affect The Us Demand For Housing? Evidence From The Autoregressive Distributed Lag Method," Manchester School, University of Manchester, vol. 78(4), pages 326-344, July.

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