IDEAS home Printed from https://ideas.repec.org/p/isu/genstf/198201010800008480.html
   My bibliography  Save this paper

Further search for the missing money

Author

Listed:
  • Shojaeddini, Mohammadreza

Abstract

The conventional form of the demand function for money worked very well in the past. However, since 1974 this function has failed to predict the public's demand for the money stock within a reasonable range of error. More specifically, since 1976 the conventional equation has overpredicted the actual quantity of money demanded. Although the Federal Reserve's newly defined monetary aggregates generally have better prediction performance than the old M-1, they show a systematic overprediction of money stock for the period of 1974:1-1980:3, the out-of-sample period in this study. The cumulative percentage errors of prediction of these new aggregates are still large and increasing in absolute value for this period. Respecifying the conventional demand function for money to include the time variable among its explanatory variables and redefining the monetary aggregate to contain overnight repurchase agreements reduced the absolute value of the percentage errors considerably. Moreover, the percentage errors of the above specification are relatively stable after 1975. That is, the percentage errors of this specification show an upward trend over the period of 1974:1-1975:4 and become stable after 1975;In the 1970s, some important institutional changes--such as authorization of telephone transfers from savings to demand deposits, preauthorized transfer of funds from savings to demand deposits, bill paying services, overdraft credit line, and automatic payroll deposits--occurred. Some wider monetary aggregates are defined to take some of these and other qualitative changes into account. Among these wider aggregates, an aggregate defined as some of M-1B, overnight RPs issued by commercial banks, overnight Eurodollar deposits at Caribbean branches of U.S. banks held by U.S. nonbank residents, money market mutual fund shares, one third of savings deposits at thrift institutions and 2/3 of savings deposits at commercial banks gave the best prediction results. The percentage errors of prediction for this aggregate are generally less than two percent.

Suggested Citation

  • Shojaeddini, Mohammadreza, 1982. "Further search for the missing money," ISU General Staff Papers 198201010800008480, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:198201010800008480
    as

    Download full text from publisher

    File URL: https://dr.lib.iastate.edu/server/api/core/bitstreams/8036c510-668f-4c39-87c5-c6d7dc1815ea/content
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jared Enzler & Lewis Johnson & John Paulus, 1976. "Some Problems of Money Demand," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 261-282.
    2. 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.
    3. 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.
    4. Dickson, Harold D & Starleaf, Dennis R, 1972. "Polynomial Distributed Lag Structures in the Demand Function for Money," Journal of Finance, American Finance Association, vol. 27(5), pages 1035-1043, December.
    5. Jared Enzler & Lewis Johnson & John Paulus, 1976. "Some Problems of Money Demand," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 261-280.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Erwin W. Heri, 1988. "Money Demand Regressions and Monetary Targeting Theory and Stylized Evidence," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 124(II), pages 123-149, June.
    2. McKenzie, C. R., 1992. "Money demand in an open economy," Journal of the Japanese and International Economies, Elsevier, vol. 6(2), pages 176-198, June.
    3. Benjamin M. Friedman, 1988. "Lessons On Monetary Policy From The 1980's," NBER Working Papers 2551, National Bureau of Economic Research, Inc.
    4. Elena Sinelnikova-Muryleva, 2011. "Innovations in the sphere of payments and the money demand in Russia," Research Paper Series, Gaidar Institute for Economic Policy, issue 157P.
    5. James N. Duprey, 1980. "The search for a stable money demand equation," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 4(Sum).
    6. Peter N. Ireland, 1991. "Financial evolution and the long-run behavior of velocity : new evidence from U.S. regional data," Economic Review, Federal Reserve Bank of Richmond, vol. 77(Nov), pages 16-26.
    7. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 107-123, February.
    8. Marvin Goodfriend, 1983. "Measurement error and a reinterpretation of the conventional money demand regression," Working Paper 83-03, Federal Reserve Bank of Richmond.
    9. Jaime R. Marquez, 1985. "Currency substitution and the new divisia monetary aggregates : the U. S. case," International Finance Discussion Papers 257, Board of Governors of the Federal Reserve System (U.S.).
    10. Olga Khon, 0000. "Money Demand: The Guide to Monetary Policy in Russia, 1997-2020," Proceedings of International Academic Conferences 11113164, International Institute of Social and Economic Sciences.
    11. Mr. Subramanian S Sriram, 1999. "Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models," IMF Working Papers 1999/064, International Monetary Fund.
    12. G. S. Laumas, 1983. "The Demand for Money in the Recent Period," Eastern Economic Journal, Eastern Economic Association, vol. 9(1), pages 1-5, Jan-Mar.
    13. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    14. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    15. James Boughton, 1992. "International comparisons of money demand," Open Economies Review, Springer, vol. 3(3), pages 323-343, October.
    16. Hans Christian Kongsted, 2002. "Testing the Nominal-to-Real Transformation," Discussion Papers 02-06, University of Copenhagen. Department of Economics.
    17. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-580, August.
    18. Bordo, Michael D. & Jonung, Lars, 1990. "The long-run behavior of velocity: The institutional approach revisited," Journal of Policy Modeling, Elsevier, vol. 12(2), pages 165-197.
    19. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611.
    20. Bozhechkova Alexandra & Trunin Pavel & Sinelnikova-Muryleva Elena & Petrova Diana & Chentsov Alexander, 2018. "Building of monetary and currency markets models," Research Paper Series, Gaidar Institute for Economic Policy, issue 175P, pages 1-96.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:isu:genstf:198201010800008480. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Curtis Balmer (email available below). General contact details of provider: https://edirc.repec.org/data/deiasus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.