Working Paper: NBER ID: w22475
Authors: Luca Benati; Robert E. Lucas Jr.; Juan Pablo Nicolini; Warren Weber
Abstract: We explore the long-run demand for M1 based on a dataset comprising 31 countries since 1851. In many cases cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate, or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I, and for high-inflation countries such as Israel. For low-inflation countries the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960) to either the log-log, or the semi-log ones. This is especially clear for the United States.
Keywords: money demand; cointegration; velocity; short-term interest rates
JEL Codes: E4; E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term interest rate (E43) | real money balances (E41) |
| money demand (M1) (E41) | short-term interest rate (E43) |
| money demand (M1) (E41) | real money balances (E41) |
| short-term interest rate (E43) | money demand (M1) (E41) |