Demand for Money in the United States: Stability and Forward-Looking Tests

• Published in: Economies Vol. 12; no. 2; p. 49
• Main Author: Kia, Amir
• Format: Journal Article
• Language: English
• Published: Basel MDPI AG 01.02.2024
• Subjects: Consumption; demand for money; European Monetary Union; Expenditures; Fiscal policy; Foreign exchange rates; forward-looking agents; GDP; Government bonds; Gross Domestic Product; Interest rates; Macroeconomics; Monetary policy; Money demand; policy regime changes; Political aspects; stability; United States economic conditions; Variables; United States; United States > US; India
• ISSN: 2227-7099; 2227-7099
• DOI: 10.3390/economies12020049

This study shows that demand for money is a function not only of interest rate, real exchange rate, and personal consumption but also of fiscal variables like deficit, debt, and foreign-financed debt. It is stable over the short and long run. This study also covers the investigation of policy invariance of money demand, an important issue ignored so far in the existing literature on the demand for money in the United States. It was found that the behavior of agents in the money market changes as the real exchange rate, consumption, and interest rate change. Namely, agents in the money market are forward-looking, and their expectations are formed rationally. This also means that even though the parameters of money demand are stable, according to the stability test results, they can be unstable, as agents adapt their behavior based on any change in the exchange rate, consumption, and/or interest rate. In other words, the contemporaneous real exchange and interest rate variables are not superexogenous in demand for M1, and the contemporaneous consumption is not superexogenous in demand for M2.