Modelling money demand: further evidence from an international comparison

Abstract

This article aims at estimating money demand for the euro area, the United States and the United Kingdom using a Dynamic Ordinary Least Squares (DOLS) estimator. Our findings show that (1) wealth effects on money demand are important in the euro area and the United Kingdom; (2) the impact of changes in the interest rate on real money holdings is negative and small; (3) goods are a reasonable alternative to money and (4) international currency substitution has a major influence on the behaviour of real money demand in the United Kingdom.

Keywords:

• money demand
• dynamic OLS

JEL Classification:

• C2
• E21
• E44
• D12

Notes

¹ Other studies made use of nonlinear frameworks. See, for instance, Khadaroo (2003) and the references therein.

² For an assessment of the role played by nonlinearity in the short-run behaviour of money demand, see Khadaroo (2003) among others. In the same context, Jawadi and Prat (2012) show that financial and monetary variable relationships exhibit nonlinearity and switching regimes.