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Financial innovations and the interest elasticity of money demand: Evidence from an error correction model

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  • Masoud Moghaddam

Abstract

The difficulty of estimating a stable money demand function has been blamed on financial innovations of the past two decades. Gurley and Shaw's [1960] thesis implies that a proliferation of money-like assets resulting from financial innovations increased the interest elasticity of money demand. However, Hafer and Hein [1984] provided empirical evidence to the contrary. This paper presents the empirical results of the M2 demand for money using an error correction model for the period 1959:1–87:4 and two subperiods 1959:1–73:4 and 1974:1–87:4. The findings suggest lower interest and price elasticities for money demand in the second sample in which money substitutes proliferated. Copyright International Atlantic Economic Society 1997

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  • Masoud Moghaddam, 1997. "Financial innovations and the interest elasticity of money demand: Evidence from an error correction model," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(2), pages 155-163, June.
    • Handle: RePEc:kap:atlecj:v:25:y:1997:i:2:p:155-163
    DOI: 10.1007/BF02298382
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