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Long-Run Money Demand Redux

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  • Luca Benati

Abstract

We explore the long-run demand for M1 based on a dataset comprising 32 countries since 1851. We report six main findings: (1) Evidence of cointegration between velocity and the short rate is widespread. (2) Evidence of breaks or time-variation in cointegration relationships is weak to nonexistent. (3) For several low-inflation countries the data prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latan (1960). This is especially clear for the United States. (4) There is no evidence of nonlinearities at low interest rates. (5) If the data are generated by either a Selden-Latan or a semi-log specification, estimation of a log-log specification spuriously causes estimated elasticities to appear smaller at low interest rates. (6) Using the correct money demand specification has important implications for the ability to correctly estimate the welfare costs of inflation.

Suggested Citation

  • Luca Benati, 2018. "Long-Run Money Demand Redux," Diskussionsschriften dp1804, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1804
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    Cited by:

    1. Fernando Alvarez & Francesco Lippi & Roberto Robatto, 2019. "Cost of Inflation in Inventory Theoretical Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 206-226, April.
    2. Rehman, Mubeen Abdur & Irfan, Muhammad & Naeem, Muhammad Abubakr & Lucey, Brian M. & Karim, Sitara, 2023. "Macro-financial implications of central bank digital currencies," Research in International Business and Finance, Elsevier, vol. 64(C).
    3. Chen, Hongyi & Siklos, Pierre L., 2022. "Central bank digital currency: A review and some macro-financial implications," Journal of Financial Stability, Elsevier, vol. 60(C).

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