The buffer stock model of money demand: evidence from panel data

Abstract

One of the tenets of the buffer stock model of money demand is that transactions money balances are shock absorbers and transitory money balances would dissipate in the long run as actual money demand adjusts to its desired level following an unanticipated income shock. However, poor performance of the standard partial dynamic aggregate money demand model since the middle 1973s has seriously challenged the validity of the buffer stock model. Utilizing panel data, this study empirically shows that the speed of adjustment is fast at the microeconomic level, and the long-run parametric estimates are not as implausible as those suggested in past aggregate studies on money demand.

Acknowledgements

The author would like to thank the editor and referees for their valuable suggestions. The views expressed are those of the author and do not necessarily reflect the views of the Department of Commerce or the Census Bureau.