The demand for money in Australia: new tests on an old topic

Abstract

The breakdown of conventional short-run demand functions for money in a number of countries, including Australia, is well known. In recent years, there has been a rush of publications, both overseas and in Australia, concerning the long-run relationships between the money stock, activity and interest rates, utilising the technique of cointegration. This paper seeks to contribute to knowledge about these empirical relationships, and their robustness. It reviews some basics of money demand theory, summarises the results of earlier papers on cointegrating relationships in the Australian data and tests for the existence of cointegration between a number of definitions of money aggregates, activity and interest rates. This very wide-ranging investigation is designed to explore the sensitivity of relationships to sensible specification changes. Cointegration between money, income and interest rates is difficult to find, and the outcomes are sensitive to the definition of activity and interest rate and to the testing procedure.

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