Abstract/Details

Money demand, structural drift, and equity returns


2006 2006

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Abstract (summary)

Recent evidence that the stock of money may transmit monetary policy into the real economy, independently of short-term interest rates, has resulted in an increased focus on monetary aggregates and money demand. I take a portfolio approach to money demand and estimate the demand for money with two opportunity cost measures---traditional bond returns and expected equity returns.

Expected equity returns are found to be important determinants of money demand in the long run. The effects of bond returns on the long-run money demand have become increasingly insignificant in the last decade and a half. I solve the 'puzzle' of bond return insignificance by explicitly allowing for structural change. Once expected equity returns and structural drifts are formally included in the specification of money demand, the interest elasticity with respect to bond return is negative and statistically significant. The elasticity of money demand with respect to expected equity returns has a significant positive drift and has become positive recently. The consumption elasticity has a strong negative drift and may be a source of the observed money demand instability.

A conventional specification of money demand cannot accommodate either multiple returns or a positive elasticity of money demand with respect to equity returns. I first show that the inclusion of heterogeneous agents or assuming uncertain asset returns allow multiple asset returns to enter the money demand equation. Then I develop a simple theory, based around the idea that multiple assets may provide liquidity services, and show that it can support both positive and negative elasticities with respect to equity returns.

Indexing (details)


Subject
Economics;
Monetary policy;
Money supply;
Interest rates;
Bonds;
Return on investment;
Liquidity;
Studies
Classification
0501: Economics
Identifier / keyword
Social sciences; Equity returns; Interest rate elasticity; Money demand; Structural drift
Title
Money demand, structural drift, and equity returns
Author
Stern, Liliana V.
Number of pages
149
Publication year
2006
Degree date
2006
School code
0093
Source
DAI-A 67/04, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
ISBN
9780542653544
Advisor
Leeper, Eric M.
University/institution
Indiana University
University location
United States -- Indiana
Degree
Ph.D.
Source type
Dissertations & Theses
Language
English
Document type
Dissertation/Thesis
Dissertation/thesis number
3215191
ProQuest document ID
305335527
Copyright
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
http://search.proquest.com/docview/305335527
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