Estimating Money Demand
Autor: felicia89 • April 4, 2015 • Term Paper • 5,069 Words (21 Pages) • 1,021 Views
Central European University
Estimating Money Demand
Case Studies: Mexico, Norway and Singapore
Ledian Asllani, Anna B. Kis, Andras Borsos, Aron Iker
March 9, 2015
Outline
Introduction
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
Introduction
Monetary 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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