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The Stability of Money Demand Function in Five Major Industrial Countries: Evidence from Cointegration Tests

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  • Madhusudan Ghosh

    (Visva-Bharati, Santiniketan)

Abstract

Using a variety of cointegration tests, this paper examines the existence of long-run equilibrium relationship in the demand function for real M1 money balance and the possibility of structural shift in the relationship in five major industrial countries. The exercise based on the maximum likelihood tests of cointegration offers strong evidence for long run equilibrium in the money demand function with short-term as well as long-term interest rate specifications in the U.S., U.K. and Canada. For Japan, the long-term interest rate specification yields more robust results than those with the short-term interest rate. The tests offer no conclusive evidence about the specification and existence of a stable long-run money demand function for Germany. The exercise also reveals significant cross-country variations in the magnitudes of real income elasticity and interest rate semi-elasticity over the specifications of the money demand function with respect to interest rates. The study offers no evidence of significant structural break in the long-run money demand function. Contrary to the recommendation of some earlier research, the results of this study suggest that the demand function for the narrowly defined monetary aggregate can be used in the formulation of monetary policy in most of the selected countries.

Suggested Citation

  • Madhusudan Ghosh, 2000. "The Stability of Money Demand Function in Five Major Industrial Countries: Evidence from Cointegration Tests," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 35(2), pages 175-192, July.
    • Handle: RePEc:dse:indecr:v:35:y:2000:i:2:p:175-192
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    Citations

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    Cited by:

    1. Aggarwal, Sakshi, 2017. "Determinants of Money Demand for India in Presence of Structural Break: An Empirical Analysis," MPRA Paper 76967, University Library of Munich, Germany.
    2. Chor Foon Tang, 2013. "Evidence on Structural Instability in the Japanese Money Demand Function," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 7(3), pages 255-272, August.
    3. Amir Kia, 2006. "Economic policies and demand for money: evidence from Canada," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1389-1407.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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