Monetary dynamics: a market approach

Abstract

The behaviour of the short-run responses implied by the identification of a long-run money demand relationship is examined. These responses have recently been interpreted as representing the policy stance of the monetary authority. However, as movements in the monetary aggregate reflect both demand and supply adjustments, estimating the short-run dynamics solely within the money demand relationship may produce biased results. In order to address this issue, the paper explicitly acknowledges the importance of the supply of money function by including the function alongside the demand for money function. While the interaction of the two equations continues to produce the long-run quantity theory result, the additional detail provides more accurate estimates of the individual short-run adjustments within the two equations.