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Time-Varying Money Demand and Real Balance Effects

Author

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  • Jonathan Benchimol
  • Irfan Qureshi
Abstract
This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that households? money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the households? preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. An empirical study of U.S. data revealed that there was a gradual fall in the interest-elasticity of money demand of approximately one-third during the 1970s due to high trend inflation. A further decline in the interest-elasticity of the demand for money was observed in the 1980s due to the changing household preferences that emerged in response to financial innovation. These developments led to a reduction in the welfare cost of inflation that subsequently explains the rise in monetary neutrality observed in the data.

Suggested Citation

  • Jonathan Benchimol & Irfan Qureshi, 2019. "Time-Varying Money Demand and Real Balance Effects," Globalization Institute Working Papers 364, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:364
    DOI: 10.24149/gwp364
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    More about this item

    Keywords

    Time-Varying Money Demand; Real Balance Effect; Welfare Cost of Inflation; Monetary Neutrality;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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