Author: William A. Barnett, Taniya Ghosh and Masudul Hasan Adil
Title: Is Money Demand Really Unstable? Evidence from Divisia Monetary Aggregates
Abstract: We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We use the same linear modeling and specification approach that had previously cast doubt on money demand stability. Autoregressive distributed lag (ARDL) cointegration models are used in the study to establish a long-term relationship between real money balances and real output, interest rate, and real effective exchange rate. For all the countries analyzed, evidence of the existence of stable demand for money is found. Broad money in general is better at capturing a stable demand for money than narrow money. The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart.
Keywords: Narrow money demand, broad money demand, simple-sum monetary aggregates, Divisia monetary aggregates, ARDL cointegration approach
JEL Code: C23, E41, E52
Weblink: http://www.igidr.ac.in/pdf/publication/WP-2021-005.pdf
