FRB: Modeling the Demand for Narrow Money in the United Kingdom and the United States

International Finance Discussion Papers

Modeling the Demand for Narrow Money in the United Kingdom and the United States
Davis F. Hendry and Neil R. Ericsson
1990-383 (July 1990)

Abstract: Despite the importance of well-specified empirical money-demand functions for inference, forecasting, and policy, problems in modeling have arisen concerning the economic theories of money demand, the data, institutional frameworks, financial innovation, and econometric implementation. By developing constant, data-coherent M1 demand equations for the UK and the US, we investigate these issues and explain such puzzles as "missing money", the great velocity decline, and the recent explosion in M1. The endogeneity of money, the Lucas critique, and the non-invertibility of our M1 models are also discussed.

Full paper(1153 KB PDF)

Keywords
Conditional models, encompassing, error-correction, exogeneity, feedback, feed-forward, invariance, Lucas critique, money demand, predictive failure

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