Description
Abstract: This paper considers several empirical issues regarding the demand for the monetary aggregates M2 and M2+. The focus is on the effect on the demand for M2/M2+ of the introduction by financial intermediaries of new types of accounts; of interest paid on deposits included in M2/M2+; the substitution between M2/M2 + and other financial assets; and the substitution between deposits at banks and deposits at other financial institutions. A growth rate specification is used to estimate the demand functions over the 1970-1985 period. It is found that the inclusion of an own rate of interest helps explain short-run movements in M2/M2 + and is important for obtaining a statistically significant effect for the opportunity cost of holding M2/M2+. The net interest elasticities, however, are very small. Amongst the wide variety of financial assets held by households, only Canada Savings Bonds were unambiguously found to be substitutes for M2/M2+. Also, there is clear evidence of substitution between M2 and the "+ ” component ofM2+. The estimates show a permanent level shift in the demand for M2/M2+ in 1982-84 which is interpreted as the result of consolidation by individuals and businesses of their balance sheets in response to the increase in the cost of financial intermediation and the severity of the recession during that period. There is no evidence of instability of the estimated demand functions in the wake of financial innovations. The estimated speed of adjustment ofM2/M2+ to a shock to prices, real income, or interest rates is considerably faster than that obtained in partial adjustment formulations of the demand for money.