Revisiting the US money demand function: an application of the Lagrange multiplier structural break unit root test and the bounds test for a long-run relationship

Abstract

In this article, we examine the issue of a levels relationship and stability of the US money demand function over the period 1959:01 to 2004:02. We use the Lagrange multiplier structural break unit root test and the bounds testing approach to a long-run relationship in levels of the variables, namely real money demand, nominal interest rate and real income. We find greater evidence for a long-run relationship in levels and stability of the US money demand function when we use M2 as a proxy for money demand. However, we find little evidence for a long-run relationship between M1 and M2 with their determinants for the recent period, spanning the last decade or so.

Acknowledgements

Helpful comments on an earlier version of this paper from a referee of this journal and Professor Mark Taylor are gratefully acknowledged. However, the usual caveats apply.

Notes

¹ The literature on the demand for money is voluminous. We do not review the literature here since it has been done in several previous issues of this Journal; see, inter alia, Hoque and Al-Mutairi, 1996; Funke and Thornton, 1999; Hamori and Hamori, 1999; Khalid, 1999; Jose and Sanchez-Fung, 2000; Karfakis and Opoulos, 2000; Siddiki, 2000; Buch, 2001; Hamori and Tokihisa, 2001; Huang et al. 2001; Ramajo, 2001; Andoh and Chappell, 2002; Bahmani-Oskooee and Chomsisengphet, 2002; Herwartz and Reimers, 2003; Bahmani-Oskooee and Rehman, 2005; Hacker and Hatemi-J, 2005.

² These information were obtained from the following webpage: http://www.duke.edu/~charvey/Country_risk/chronology/us-events.htm