The demand for currency in the presence of indexed money: the case of Brazil

Abstract

The presence of indexed money modifies the demand for currency equation. An optimal demand for currency is derived from a transaction cost model, which includes indexed money. This money demand considers inflation an argument along with output and nominal interest rate. The estimation for the Brazilian case shows that inflation and nominal interest rates are found negatively and output positively related to the demand for narrow money. The parameter stability tests show that the disequilibrium error should not reflect the impact of inflation.