Modeling US Households' Demand for Liquid Wealth in an Era of Financial Change
نویسندگان
چکیده
Money demand modelsoverpredicted M2 growth in theUnited States from 1990 to 1993. We examine this overprediction using a model ofhousehold demand for liquid wealth. The model is a dynamic generalization ofthe almost-ideal demand model ofDeaton and Muellbauer (1980). We find that the own-price elasticity ofmoney demand rose substantially after 1990. We also find important cross-price elasticities of money with respect to other liquid financial assets, notably with respectto mutual funds. Incorporating these and other features helps explain nearly 50 percent ofthe shortfall in M2 growth over the period in question. It also suggests that households respond more rapidly to changes in market interest rates than is assumed in some limited-participation general equilibrium macroeconomic models.
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