The Demand for Money (eBook)

Apostolos Serletis is University Professor and Professor of Economics and Finance at the University of Calgary. Since receiving his Ph.D. from McMaster University in 1984, he has held visiting appointments at the University of Texas at Austin, the Athens University of Economics and Business, and the Research Department of the Federal Reserve Bank of St. Louis. Professor Serletis’ teaching and research focus on monetary and financial economics, macroeconometrics, and nonlinear and complex dynamics. He is the author of eight books, including The Theory of Monetary Aggregation, co-edited with William A. Barnett (Elsevier 2000), Financial Markets and Institutions: First Canadian Edition, with Frederic S. Mishkin and Stanley G. Eakins (Addison Wesley 2004), Money and the Economy (World Scientific 2006), The Economics of Money, Banking, and Financial Markets: Third Canadian Edition, with Frederic S. Mishkin (Addison Wesley 2007), Functional Structure Inference, co-edited with William A. Barnett (Elsevier 2007), and Quantitative and Empirical Analysis of Energy Markets (World Scientific 2007). In addition, he has published close to 150 articles in such journals as the Journal of Economic Literature, the Journal of Monetary Economics, the Journal of Money, Credit and Banking, the Journal of Econometrics, the Canadian Journal of Economics, the Journal of Economic Dynamics and Control, the Journal of Business and Economic Statistics, the Journal of Banking and Finance, the Journal of Applied Econometrics, and Macroeconomic Dynamics. Professor Serletis is an Associate Editor of Macroeconomic Dynamics and a member of the editorial board at two academic journals, the Journal of Economic Asymmetries and the Journal of Economic Studies. He lives in Calgary, with his wife Aglaia.

Contents 6
Acknowledgments 13
Foreword 14
Introduction 17
Part 1: Static Monetary Macroeconomics 21
1 Classical Macroeconomic Theory 22
1.1 The Complete Classical Model 23
1.2 The Classical Dichotomy 26
1.3 The Classical AD-AS Model 27
1.4 The Neutrality of Money 29
1.5 Conclusion 30
2 Keynesian Macroeconomic Theory 31
2.1 The Keynesian Consumption Function 32
2.2 The Complete Keynesian Model 32
2.3 The Keynesian-Cross Model 34
2.4 The IS-LM Model 35
2.5 The Keynesian AD-AS Model 39
2.6 Conclusion 41
Part 2: Dynamic Monetary Macroeconomics 43
3 Models with Rational Expectations 45
3.1 The Cagan Model 46
3.2 Adaptive Expectations 47
3.3 Rational Expectations 48
3.4 The Lucas Critique 51
3.5 Rules versus Discretion 56
3.6 Time Inconsistency 58
3.7 Inflation Mitigation 60
3.8 Conclusion 60
4 Neoclassical Growth Theory 62
4.1 The Solow Model 62
4.2 The Optimal Growth Model 67
4.3 The Overlapping Generations Model 72
4.4 Conclusion 77
5 Monetary Growth Theory 79
5.1 The Tobin Model 80
5.2 The Sidrauski Model 84
5.3 A Variation of the Sidrauski Model 86
5.4 The New Empirics of Monetary Growth 88
5.5 Conclusion 89
6 The Welfare Cost of Inflation 91
6.1 The Money Demand Function 91
6.2 The Consumer Surplus Approach 92
6.3 The Compensating Variation Approach 94
6.4 Empirical Evidence 98
6.5 Conclusion 100
Part 3: Theoretical Approaches to the Demand for Money 102
7 The Classics, Keynes, and Friedman 103
7.1 The Equation of Exchange 104
7.2 The Quantity Theory of Money 104
7.3 The Quantity Theory Demand for Money 105
7.4 The Cambridge Cash Balance Equation 106
7.5 The Keynesian Approach 107
7.6 Friedman’s Modern Quantity Theory 110
7.7 Conclusion 113
8 Transactions Theories of Money Demand 115
8.1 The Baumol-Tobin Model 115
8.2 The Shopping-Time Model 118
8.3 Cash-in-Advance Models 121
8.4 Conclusion 125
9 Portfolio Theories of Money Demand 127
9.1 Tobin’s Theory of Liquidity Preference 127
9.2 Money and Overlapping Generations 130
9.3 Conclusion 134
Part 4: Empirical Approaches to the Demand for Money 136
10 Conventional Demand for Money Functions 138
10.1 The Basic Specification 139
10.2 The Long-Run Function 144
10.3 Money Demand Dynamics 147
10.4 First-Difference Specifications 149
10.5 Conclusion 151
11 Modeling Trends in the Variables of the Money Demand Function 152
11.1 Deterministic and Stochastic Trends 153
11.2 Testing for Unit Roots 155
11.3 Testing for Stationarity 159
11.4 Fractional Integration 160
11.5 Testing for Nonlinearity and Chaos 161
11.6 Detecting Signatures of Self-Organization 167
11.7 Conclusion 169
12 Cointegration and the Aggregate Demand for Money Function 170
12.1 Cointegration 171
12.2 Cointegration and Common Trends 171
12.3 Cointegration and Common Cycles 173
12.4 Cointegration and Codependent Cycles 174
12.5 Cointegration and Error Correction 175
12.6 Cointegration and Money Demand 176
12.7 Testing for Cointegration 178
12.8 A Bounds Testing Approach 183
12.9 Conclusion 186
13 Balanced Growth, the Demand for Money, and Monetary Aggregation 187
13.1 Theoretical Background 188
13.2 Univariate Tests for Unit Roots 189
13.3 Testing the c, i, y System 190
13.4 Testing the m - p, y, R System 192
13.5 Testing the c, i, m- p, y, R System 193
13.6 Conclusion 193
14 Cross-Country Evidence on the Demand for Money 197
14.1 Cross-Country Data 198
14.2 Cross-Country Specifications 198
14.3 Cross-Country Evidence 202
14.4 Robustness 207
14.5 Conclusion 208
Part 5: Microfoundations and Monetary Aggregation 209
15 The Microeconomic Foundations of the Definition of Money 210
15.1 The Simple-Sum Index 211
15.2 The User Cost of Money 212
15.3 Microeconomic Foundations 214
15.4 Aggregation Theory 216
15.5 Index Number Theory 218
15.6 Diewert’s Link 220
15.7 Conclusion 222
16 The New Monetary Aggregates 223
16.1 The Neoclassical Monetary Problem 224
16.2 Understanding the Divisia Aggregates 225
16.3 Divisia Second Moments 227
16.4 Measurement Matters 228
16.5 The MQ and CE Indexes 229
16.6 Empirical Comparisons 231
16.7 Conclusion 240
17 Nominal Stylized Facts 241
17.1 The Hodrick and Prescott Filter 242
17.2 The Cyclical Behavior of Money 243
17.3 Prices, Interest Rates, and Velocity 246
17.4 Robustness 250
17.5 Conclusion 252
Part 6: Microfoundations and the Demand for Money 253
18 The Nonparametric Approach to Demand Analysis 254
18.1 The Idea of Revealed Preference 255
18.2 The Maximization Hypothesis 256
18.3 Homotheticity 256
18.4 Direct Separability 257
18.5 Indirect Separability 260
18.6 Homothetic Separability 262
18.7 NONPAR Tests of Consumer Behavior 263
18.8 Conclusion 264
19 The Parametric Approach to the Demand for Monetary Assets 266
19.1 The Direct Utility Approach 266
19.2 The Indirect Utility Approach 268
19.3 The Slutsky Conditions 271
19.4 Conclusion 277
20 Locally Flexible Functional Forms and Demand Systems 278
20.1 Locally Flexible Forms 279
20.2 Effectively Globally Regular Forms 282
20.3 Imposing Local Curvature 285
20.4 Conclusion 291
21 Globally Flexible Functional Forms and Demand Systems 293
21.1 The Fourier Model 294
21.2 The AIM Model 296
21.3 Computational Considerations 302
21.4 Imposing Curvature Restrictions 303
21.5 Conclusion 305
Part 7: Microeconometrics and the Demand for Money 306
22 The Econometrics of Demand Systems 307
22.1 Dimension Reduction 308
22.2 Duality and Functional Structure 310
22.3 Stochastic Specification 311
22.4 Autoregressive Disturbances 313
22.5 Theoretical Regularity 315
22.6 Econometric Regularity 316
22.7 Expenditure and Price Elasticities 317
22.8 Elasticities of Substitution 317
22.9 Conclusion 319
23 Applied Monetary Demand Analysis 320
23.1 The Monetary Problem 321
23.2 The Basic Translog and the Demand for Money 322
23.3 The AIM(2) Model and the Demand for Money 327
23.4 Conclusion 334
24 Future Research Agenda 335
24.1 Outstanding Credit 336
24.2 Monetary Policy 336
24.3 Dynamics 336
24.4 Risk Matters 339
24.5 Conclusion 344
References 345
Author Index 370
Subject Index 374