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Demand for Money in the United States: Stability and Forward-Looking Tests

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  • Amir Kia

    (Finance and Economics Department, Utah Valley University, Orem, UT 84058-5999, USA)

Abstract

This study shows that demand for money is a function not only of interest rate, real exchange rate, and personal consumption but also of fiscal variables like deficit, debt, and foreign-financed debt. It is stable over the short and long run. This study also covers the investigation of policy invariance of money demand, an important issue ignored so far in the existing literature on the demand for money in the United States. It was found that the behavior of agents in the money market changes as the real exchange rate, consumption, and interest rate change. Namely, agents in the money market are forward-looking, and their expectations are formed rationally. This also means that even though the parameters of money demand are stable, according to the stability test results, they can be unstable, as agents adapt their behavior based on any change in the exchange rate, consumption, and/or interest rate. In other words, the contemporaneous real exchange and interest rate variables are not superexogenous in demand for M1, and the contemporaneous consumption is not superexogenous in demand for M2.

Suggested Citation

  • Amir Kia, 2024. "Demand for Money in the United States: Stability and Forward-Looking Tests," Economies, MDPI, vol. 12(2), pages 1-18, February.
    • Handle: RePEc:gam:jecomi:v:12:y:2024:i:2:p:49-:d:1339593
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    References listed on IDEAS

    as
    1. Tsutomu Watanabe & Tomoyoshi Yabu, 2023. "The demand for money at the zero interest rate bound," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(6), pages 968-976, September.
    2. Amir Kia, 2020. "Impact of Public Debt, Deficit and Debt Financing on Private Investment in a Large Country: Evidence from the United States," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 6(2), pages 139-161, December.
    3. Boucekkine, R. & Laksaci, M. & Touati-Tliba, M., 2021. "Long-run stability of money demand and monetary policy: The case of Algeria," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    4. Laurence Boone & Paul Noord, 2008. "Wealth effects on money demand in the euro area," Empirical Economics, Springer, vol. 34(3), pages 525-536, June.
    5. Amir Kia & Ali F. Darrat, 2003. "Modeling Money Demand under the Profit-Sharing Banking Scheme: Evidence on Policy Invariance and Long-Run Stability," Carleton Economic Papers 03-13, Carleton University, Department of Economics, revised Apr 2007.
    6. Matteo Mogliani & Giovanni Urga, 2018. "On the Instability of Long‐Run Money Demand and the Welfare Cost of Inflation in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1645-1660, October.
    7. Kia, Amir, 2013. "Determinants of the real exchange rate in a small open economy: Evidence from Canada," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 163-178.
    8. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-429, November.
    9. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
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