Estimating Money Demand
Central European UniversityEstimating Money DemandCase Studies: Mexico, Norway and SingaporeLedian Asllani, Anna B. Kis, Andras Borsos, Aron IkerMarch 9, 2015OutlineIntroduction        Analysis country by country        Mexico        Norway        Singapore        Comparing country results        References        Appendix        Mexico        Johansen method        Norway        Engle-Granger, short run cointegrating relationship, automatic model selection, 1996-2005        Johansen method, 1996-2007        Johansen method, 2007-2012        Singapore        Johansen method        IntroductionMonetary policy can have a great effect on the economy by dampening cycle effects or at least eliminating itself as a possible source of macroeconomic volatility. One of its common tools is to set the money supply as an adequate response to changes in money demand. Nevertheless, in order to do so, macroeconomists need reliable estimations on money demand.The standard money demand formula can be written as M=P*L(Y,R) where M denotes nominal amount of money demanded, P stands for price level, Y is real output, R is the nominal interest rate and L(.) can be interpreted as some kind of liquidity preference function. Or alternatively, in quantitative theory of money (which is another basic approach) the formula is written as M*V=P*Y, where V is velocity of money. The common feature of the two approaches is that in case of stable money velocity or liquidity preferences, the money demand can easily be estimated. At least, this seemed to be the case until the mid-70s when due to the massive financial innovations (technological developments, financial deregulations, new types of assets), money demand became highly unstable. Since data for our chosen countries (Mexico, Norway and Singapore) are available mainly after the 80’s, our goal cannot be to get results relevant for policy purposes but to illustrate how money demand estimation may be conducted in practice.

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Money Demand And Country        Mexico        Norway        Singapore. (April 3, 2021). Retrieved from