A substitution test of long-run money demand

Stefan C. Norrbin, Kevin Reffett

Research output: Contribution to journalArticlepeer-review


Using a cash-credit cash-in-advance model, we derive a key long-run substitution condition between interest rates and ratios of alternative means of payment (such as inside and outside monies) which we test as an alternative to the standard money demand function specification of Meltzer (1963). The theoretical model thus eliminates one source of nonstationarity resulting in a more powerful test of the stability of money demand. Using the recent cointegration techniques of Park (1992) and Johansen (1988), we find strong support for the long-run stability of this alternative money demand specification. Unlike prior research, the findings imply support for long-run money demand stability for narrow monetary aggregates.

Original languageEnglish (US)
Pages (from-to)253-270
Number of pages18
JournalJournal of Macroeconomics
Issue number2
StatePublished - Jan 1 1996

ASJC Scopus subject areas

  • Economics and Econometrics


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