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.
ASJC Scopus subject areas
- Economics and Econometrics