Working Paper: CEPR ID: DP5050
Authors: Andreas M. Fischer
Abstract: Recent time-series evidence has reconfirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy.
Keywords: cross-regional estimates; money demand; regional financial sophistication
JEL Codes: C21; E41; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial sophistication (G53) | Income elasticity (D12) |
| Population density (J11) | Income elasticity (D12) |
| Presence of financial centers (F65) | Income elasticity (D12) |
| Financial sophistication (G53) | Money demand (E41) |
| Income elasticity (D12) | Money demand (E41) |