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Unformatted text preview: A Survey of Recent Empirical Money Demand Studies SUBRAMANIAN S. SRIRAM * This paper surveys a selected number of studies that evaluated the demand for money using the error-correction model approach in the 1990s across a range of industrial and developing countries. It briefly presents issues relevant to modeling and estimating the demand for money; and synthesizes information concerning variables, data period and frequency, unit root and cointegration techniques, stability tests, and findings in a tabular form. In addition, it presents estimated long-run income elasticity and elasticities or semi-elasticities for opportunity cost and other variables in a comparable framework. It aims to provide a reference tool for future research on demand for money in various countries. [JEL E41] D emand for money plays a major role in macroeconomic analysis, especially in selecting appropriate monetary policy actions. Consequently, a steady stream of theoretical and empirical research has been carried out worldwide over the past several decades. The interest has, however, heightened in recent years, triggered primarily by the concern among central banks and researchers on the impact of the movement toward flexible exchange rate regime, globalization of capital markets, ongoing domestic financial liberalization and innovation, advancement in time series econometrics, and country-specific issues. The extensive literature underscores two major points relevant to modeling and estimating the demand for money: variable selection and representation, and 334 IMF Staff Papers Vol. 47, No. 3 2001 International Monetary Fund M V P Y = s t + 1 P S = * P V Q X t t t + ( ) + + 1 y p + ( 1 + ( ) i S * Y i ( ) , * S P P , + > * * This paper was written while the author was with the IMF Research Department; currently he is an Economist in the IMF Statistics Department. He thanks Michael D. Bradley and Frederick L. Joutz of George Washington University; Charles Adams, James Boughton, and Timothy D. Lane of the IMF; Neil Ericsson of the Board of Governors of the Federal Reserve System, and K.S. Venkatraman, formerly of the World Bank, for useful comments. A SURVEY OF RECENT EMPIRICAL MONEY DEMAND STUDIES 335 framework chosen. Failure to provide due consideration to these issues has tended to yield poor results. For the former, proper specification of opportunity cost vari- ables happens to be the most important factor in getting meaningful results. Regarding the latter, the chosen system should be free of theoretical and estima- tion problems, and should perform well in empirical testing. The error-correction models (ECMs) have shown to meet these criteria. This paper surveys a selected number of papers that applied the ECM approach to analyze the demand for money (of various definitions) during the 1990s in several industrial and developing countries....
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