Working Paper: NBER ID: w0524
Authors: Jack Carr; Michael R. Darby
Abstract: Previous models of the demand for money are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible fluctuations in interest rates in response to unexpected changes in the nominal money supply. This paper proposes a shock-absorber model of money demand in which money supply shocks affect the synchronization of purchases and sales of assets and so engender a temporary desire to hold more or less money than would otherwise be the case. Expected changes in nominal money do not cause fluctuations in real money inventories. The model is simultaneously estimated for the United States, United Kingdom, Canada, France, Germany, Italy, Japan, and the Netherlands using the postwar quarterly data set and instruments used in the Mark III International Transmission Model. The shock-absorber variables significantly improve the estimated short-run money demand functions in every case.
Keywords: money supply shocks; short-run demand for money; shock absorber model; monetary policy
JEL Codes: E41; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money supply shocks (E51) | temporary changes in the demand for money (E41) |
| temporary changes in the demand for money (E41) | synchronization of asset transactions (G10) |
| nominal money supply increases unexpectedly (E51) | desire to hold more money (E41) |
| money supply shocks (E51) | smaller fluctuations in interest rates (E43) |