Beruflich Dokumente
Kultur Dokumente
M. GOLDFELD
Princeton University
The
Demand
for
Money
Revisited
of virtuallyall theories
that explainthe evolutionof aggregateeconomicactivity.More particularly, an accurateunderstandingand portrayalof this marketis essential
both to the analysisof past monetarypoliciesand to the formulationof
appropriatecontemporarypolicy.This paperfocuseson one aspectof the
money market,the demandside, and providesan extensivereviewof the
currentstate of the art concerningthe demandfor money.The emphasis
will be unabashedlyempirical,withconcentrationon the shortterm,taken
hereto be quarterly,sincethis horizonappearsto be the most relevantto
policypurposes.'
Therehas beena substantialamountof pastresearchon the demandfor
moneyand severalsurveypiecesas well.2Nevertheless,a numberof good
reasonsarguefor embarkingon anotherbroadempiricaleffort.In the first
THE MONEY MARKET IS A CRITICAL COMPONENT
578
StephenM. Goldfeld
579
Outline
580
(1)
m-f(r, y).
A varietyof storiescan explainthe originsof equation(1). Perhapsthe
most satisfyingis the transactionsview, in whichthe demandfor money
evolvesfroma lack of synchronization
betweenreceiptsandpaymentsand
the existenceof a transactionscost in exchangingmoneyfor interest-bearing assets(usuallytakento be shortterm).
Oneexampleof this approachis the well-knownBaumol-Tobinformulation which readilyleads to an equationof the form of (1). Its simplest
versionis the so-calledsquareroot law of moneyholdings,7
(1')
m = ky-r?,
6. Although interest paymentson demand deposits have been prohibited,the existence of servicechargesmay producean implicityield on demanddeposits.Some writers
have used service chargesas a measure of negative interest payment but this practice
suffersfrom ratherseriousconceptualproblems.Recently, Barroand Santomerohave
constructedan explicitmarginalreturnon depositsbasedon remissionof servicecharges.
Unfortunately,the series is annual and stops in 1968. It does, however,vary substantially in the late 1960s,suggestingthat this may be an importantomittedvariablein demand-for-moneyequations.See Robert J. Barroand Anthony M. Santomero,"Household Money Holdings and the Demand Deposit Rate," Journalof Money, Creditand
Banking,Vol. 4 (May 1972), pp. 397-413.
7. One assumptionnecessaryto produce(1') is that real transactionscosts have remained essentiallyconstant. This is an assumption of doubtful validity and also may
StephenM. GoldJeld
581
582
(2)
(3)
y7(m*-
y(ln m* - ln m,-),
01
or
In m, - ln mt-
(3')
0.271 +0.193Iny+0.717Inmm_
(2.2)
(5.3)
(11.5)
-
0.019 ln RCP
(6.0)
R2 =
0.045 ln RTD.
(4.0)
10. This sample period was used in most of the equationsthat follow, primarilyfor
ease of comparisonwith equationsbased on the flow of funds data, which are available
Stephen M. Goldfeld
583
At firstglancethisequationseemsquitereasonable.Boththe commercial
paper rate and the time deposit rate are significant,with long-runelasticities of 0.07 and 0.16, respectively.The coefficientof adjustment-that
is, 7 in (3')-is 0.283(= 1 - 0.717);whilethisis not dramatically
rapid,it is
certainlymore plausiblethan the slow 0-10 percentestimatesthat some
writershave reported.'1The point estimateof the long-runincome elasticityis 0.68 and a 95 percentconfidenceintervalfor the incomeelasticity,
derivedby a methoddue to Fieller,12turnsout to be (0.60, 0.82). Consequently,the incomeelasticityappearsto be significantlyless than unity.'3
Besidesyieldingplausibleparametervalues, equation(4) also fits the
data quite well. This can be seen in Figure 1, which depictsthe actual
valuesof the real money stock along with the valuespredictedby equation (4).
INCOME ELASTICITY: A CLOSER LOOK
ON Iz
~ ON~~~~~~~~~~~0
Po~~~~~~
~~~~~~~~~~~~~~~~~-
P0
0'
*~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Stephen M. Goldfeld
585
deservesadditionalattentionis the estimateof the long-runincomeelasticity. Judgedby the size of the confidenceintervalreportedabove, the
estimateof this importantparameterappearsto be fairlyprecise.On the
other hand, WilliamPoole has suggestedthat the income elasticityestimated from quarterlypostwardata reallycannot be pinned down accurately.14Sinceit will shedsomefurtherlight on the qualityof the estimates
in (4), a briefexplorationof Poole'sargumentwill be worthwhile.
Supposean estimatingequationtakesthe form
(5)
lnm, = a+bIny,+
clnr +dlnm,-1.
In m,-e
In Yt= a + c In r, + d(n
m,_
-e
In Y),
15. Although it is not indicated,the t-statistic for RTD declined to about 0.5 as e
increased.
orc
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(ON
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Stephen M. Goldfeld
587
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StephenM. Goldfeld
589
590
data underlyingthese calculationsare plotted in Figure 1. The fourquarterforecastis for the yearfollowing the end pointfor a particularrow.
For example,the worstforecastingerroroccurredin 1966with an RMSE
of $2.3 billionand this appearsin the 1965row. In fiveof the twelveyears
the ex post forecastwas no worsethan the within-sampleRMSE, which
seemsa creditableperformance.Furthermore,this was truein 1971,a year
reputedto be one of instability,21
as well as in 1972.Theforecastsfor 1973
appearto be a bit wideof the markbut thisjudgmentis basedon only two
observations-of preliminarydata, at that-so one shouldnot make too
muchof it.
On the whole, the money demandfunction does not exhibit marked
short-runinstability.However,this is only one chapterof the short-term
forecastingstory. For one thing, the analysishas assumedboth known
interestratesandrealGNP. In addition,it explainsmoneydemandin real
terms so that to forecastnominalmoney demandwould requirea price
forecast,whichwouldintroducefurthererror.22Giventhesecaveats,however,it is reassuringto find a reasonabledegreeof short-runstability.
LONG-TERM STABILITY
Stephen M. Goldfeld
591
0.060 ln RTD
(4.1)
R2 =
(4") ln m
(1.8)
(3.3)
(4.8)
-
0.014 ln RCP
(2.4)
0.010 ln RTD.
(0.3)
Sampleperiod: 1962:1-1972:4.
MarketApproachto the Demandfor Money and the Implicationsfor MonetaryPolicy"
(Board of Governorsof the FederalReserveSystem, 1972; processed).
25. Rather than split the sample at some given point, one may use techniquesfor
testing the hypothesisthat a split occurredat some arbitrarypoint in the period. A
number of these techniques are described in Stephen M. Goldfeld and Richard E.
Quandt,NonlinearMethodsin Econometrics(North-Holland,1972),Chap. 9.
592
The biggestdifferencebetweenthesetwo equationsappearsin the coefficient of RTD and it is largelyattributableto the sizablejumpin RTD that
occurredpreciselyat the breakingpoint.26A formaltest of stability,carried
out by applyinga Chowtest to this samplesplit, resultedin an F statistic
of 0.84, whichdoes not allow one to rejectthe hypothesisof stability.27
On balance,then, the evidencedoes not seem to suggestany need to
estimatethe money demandequation over separatesubsamplesof the
postwarperiod.
Stephen M. Goldfeld
593
Definition
of money
Money
variable
Income lagged
RTD
RCP
R2
Standard
error
M2
0.119
(2.6)
0.948
(33.4)
0.006
(0.8)
-0.030
(7.7)
0.9987
0.0044
Time deposits
0.255
(3.0)
0.847
(18.7)
0.062
(4.7)
-0.051
(7.2)
0.9997
0.0075
ml
0.193
(5.3)
0.717
(11.5)
-0.045
(4.0)
-0.019
(6.0)
0.9953
0.0043
594
Timedeposits
Ex post
End
pointa
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Sample
period
(1)
1.74
1.70
2.12
2.39
2.80
2.78
2.76
3.02
3.38
4.14
4.81
Fourquarter
(2)
1.54
5.05
2.30
3.56
3.25
7.84
3.09
7.00
9.81
5.11
1.10
Full
(3)
71.46
71.55
54.64
39.57
18.71
34.98
18.83
6.81
24.08
4.94
1.10
Ex post
Sample
period
(4)
0.94
0.96
1.30
1.60
2.27
2.35
2.52
2.32
2.98
2.29
2.18
Fourquarter
(5)
1.52
3.22
2.52
5.04
0.57
4.18
1.38
3.99
2.93
2.02
2.60
Full
(6)
46.76
43.37
37.61
28.58
10.86
10.80
4.87
3.68
6.64
1.73
2.60
Incomecoefficient
(7)
-0.011
0.026
0.039
0.072
0.156
0.154
0.169
0.177
0.191b
0.248b
0.267b
Stephen M. Goldfeld
595
umn of Table 3, which reports the estimated income coefficient for alternative sample periods. That coefficient rises steadily over the period and does
not achieve statistical significance until the sample period runs through
1969. One would expect, as with M2, that the time deposit equation would
fail a formal stability test. The appropriate Chow F statistic is 4.25 and the
correspondingx2 is 22. 1, allowing one to reject stability by either test at the
1 percent level.
This finding suggests, at the very least, that the simple specification used
for M1 will not work for time deposits and therefore should not be implicitly so used by estimating a similar equation for M2.29The situation is,
however, worse than that, since even given the questionable time deposit
equation, the ex post forecasts of M2 obtained from the aggregate equation
are inferior to those obtained from adding together the separate component forecasts, thus suggesting that aggregation is inflicting some positive
harm in the present context.30
In summary, for both theoretical and empirical reasons, aggregation to
the level of M2 seems to be a distinctly inferior procedure.
Disaggregation. Although these findings confirm that greater aggregation in the estimation of the demand for money is not called for, there
remains the question of whether some disaggregation would be appropriate. The most obvious type of disaggregation would be to estimate separate
equations for currency and demand deposits,31 as is done in many macroeconometric models for a variety of reasons. For one, disaggregation permits greater flexibility in the choice of variables and specification of adjustment patterns. Second, and perhaps of more practical importance, currency
is needed as an endogenous variable for analyzing monetary policy. In
particular,a means of splitting up high-powered money (a variant of which
is usually taken as a policy instrument) into reserves and currency may be
needed to trace out the money supply mechanism. In any event, there are
good precedents for attempting to explain currency and demand deposits
separately.
29. I brieflyexperimentedwith several other interestrates in both the time deposit
and M2 equationsbut these never achievedstatisticalsignificance.
30. I spare the reader the additional numbers.However, the remarkin the text is
basedon addingtogetherthe separateextrapolationsfor Ml and time depositsand then
comparingthe RMSEs with those in Table 3.
31. Disaggregatingby type of holderis consideredbelow. To some extent, separation
into currencyand demanddeposits is also a partialstep in this direction.
596
RTD
RCP
R2
Standard
error
Demand
0.181
deposits (5.2)
...
0.693
(9.9)
-0.040
(3.7)
-0.021
(6.0)
0.992
0.0049
Currency
0.190
(5.3)
...
0.804
(19.0)
-0.046
(3.9)
-0.007
(2.0)
0.998
0.0042
Currency
...
0.591
(8.3)
-0.025
(1.7)
-0.001
(0.2)
0.998
0.0043
0.279
(6.2)
The first two equations use exactly the same specification and sample period
as equation (4). Both seem relatively satisfactory, and surprisinglyenough,
both interest rate variables show up in the currencyequation. The long-run
income elasticity of the demand deposit equation is 0.59, while that of the
currency equation is 0.97. These bracket the 0.68 elasticity found for M1.
The speed-of-adjustment coefficients also bracket the M1 result with demand deposits adjusting somewhat more rapidly than currency.
The final row of the tabulation contains the results of one minor modification in the currencyequation, the substitution of consumer expenditures
for GNP as the transactions variable and the corresponding use of the
consumption deflator.32 This procedure has pronounced effects on the
equation: first, it renders both interest variables statistically insignificant;
and second, it considerablyspeeds up the adjustmentof currencyholdings.33
How do the component equations stand up when subjected to dynamic
simulation? The relevant results are reported in Table 4. The two versions
of the currency equation perform comparably on the four-quartersimulations, producing only small forecasting errors. The demand deposit equation, as expected, yields smaller RMSEs than the aggregate equation
32. This, for example,was used in Modigliani,Rasche, and Cooper, "CentralBank
Policy."
33. There is some question, however,about the generalityof this second finding.In
particular,the laggedstock coefficientswith GNP and consumptionwere virtuallyidentical for all the equationsunderlyingTable 4 below. Only when 1971(or 1971and 1972)
were includedin the sample did the differencecited in the text emerge.
597
Stephen M. Goldfeld
Four-quarter
extrapolation
Currency,by
transactionsvariable
Currency,by
transactionsvariable
End
point"
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Demand
deposits
0.59
0.44
0.42
0.84
2.06
0.92
1.40
0.75
1.43
0.78
0.97
Consumer Gross
expendi- national
tures
product
0.10
0.61
0.30
0.23
0.34
0.13
0.17
0.25
0.09
0.19
0.35
0.09
0.68
0.05
0.22
0.45
0.25
0.34
0.10
0.23
0.22
0.37
Demand
deposits
2.07
1.25
1.94
2.27
1.78
2.21
1.79
0.90
1.15
1.14
0.97
Consumer Gross
expendi- national
tuires product
2.64
0.61
3.83
1.26
1.37
0.47
0.23
0.36
0.14
0.16
0.35
0.45
1.59
1.17
0.77
0.87
0.69
0.84
0.43
0.29
0.20
0.37
598
End
point"
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Disaggregate, by
transactions variable
Disaggregate, by
transactions variable
Gross
national
product
Consumer
expenditures
Aggregate
Gross
national
product
Consumer
expenditures
Aggregate
0.64
1.13
0.41
1.04
2.49
1.10
1.72
0.73
1.64
0.88
1.12
0.64
1.05
0.53
1.06
2.53
0.97
1.54
0.77
1.40
0.87
1.09
1.42
1.60
0.65
0.88
2.33
1.14
1.48
0.70
2.05
0.86
1.10
1.87
1.56
2.97
2.95
2.48
2.82
2.50
1.04
1.28
1.15
1.12
4.48
1.37
5.47
3.35
2.84
1.93
1.75
1.02
1.19
1.15
1.09
5.22
4.08
1.24
2.57
2.19
2.71
2.21
1.13
1.53
1.23
1.10
Source: Aggregate columns are from Table 2; disaggregate data are derived from separate forecasts for
currency and demand deposits, the components of Ml.
a. See Table 2, note a.
Stephen M. Goldfeld
599
m = a + bye + cre,
600
RrookingsPaperson EconomicActivity,3:1973
Y-
(9)
= X(rt -rte)
re-_e
YXt
-p2(1G X -
(8')
i=o
iyti.
(10)
X)mt-1.
rt-r _r
(11)
= 6(rt -rt_),
mt =
ClYt +
Co +
C2yVt1 +
C3rA +
C4rt1
C5mt-1
C6mt-2,
-(
Yt-_) ?
X2(Yt-1
Yt_2)
StephenM. Goldfeld
601
o~
o~
so~
O
C
?0
0_
.o
.
~0
~~~~Eio
.o
.o~o
oc
0 * 0 * o
C4~~~~~~~~*
0
EF
'0
:xDoo
~
(J~~~~~~~~~~~0
~
00
O~~~0
r
i
(0,
"I.~~~~
00
~~~~~
.ZI .
C4I
tr)
C)
C
0DtC)
m
04C
.0
?y
tr)
c
U
)c
:
sC
0~~~~~~~~~~
Po
~~~~~~~~~~~~~~~~~~0
603
StephenM. Goldfeld
Table 7. Comparisonof CumulativePercentage Responses of
Regressions A and B of Table 6 after Selected Numbers of Quarters
RegressionB (text equation10')
Numberof
quarters
RegressionA
(text equation4)
Income
24.7
50.3
67.2
78.2
93.2
28.3
48.6
63.0
73.5
90.2
1
2
3
4
7
Interestrate Interestrate
on commercial
on time
paper
deposits
15.7
45.7
65.7
78.6
96.6
18.1
45.6
63.8
75.6
91.3
nj
(13) In m, =c + E
i=O
Wi l:nYt-i +
M3
"l
E w' In RTD,_
i=O
CtX
i=O
604
Demand deposits
Income
RTD
RCP
Income
RTD
RCP
0.146
(3.6)
0.119
(4.8)
0.094
(6.9)
0.073
(6.5)
0.056
(3.7)
0.041
(2.2)
0.030
(1.5)
-0.028
(2.1)
-0.033
(4.9)
-0.034
(4.7)
-0.030
(3.7)
-0.021
(3.2)
-0.009
(1.3)
0.009
(0.6)
-0.014
(3.7)
-0.014
(6.7)
-0.012
(5.7)
-0.011
(3.9)
-0.009
(3.0)
-0.006
(2.0)
-0.003
(0.7)
0.131
(3.1)
0.105
(4.3)
0.082
(6.5)
0.063
(5.9)
0.047
(3.0)
0.034
(1.7)
0.024
(1.2)
-0.024
(1.67)
-0.031
(4.7)
-0.032
(4.2)
-0.028
(3.2)
-0.019
(2.6)
-0.004
(0.6)
0.017
(1. 1)
-0.014
(3.4)
-0.014
(7.2)
-0.013
(6.1)
-0.012
(4.2)
-0.010
(3.3)
-0.007
(2.2)
-0.003
(0.7)
0.022
...
...
0.018
...
...
0.015
...
...
(0.9)
0.015
(1.2)
...
...
0.019
...
...
0.025
(0.9)
(1.2)
0.017
(1.1)
0.016
(1.2)
0.018
(1.1)
0.023
(0.9)
2 = 0.656
...
...
(0.9)
(1.2)
2 =-0.145
2 =-0.068
(17.3)
(8.8)
(5.4)
R2 = 0.995, standard error = 0.0046, p = 0.82
2 = 0.577
2 =-0.121
2 =-0.073
(19.4)
(10.3)
R2 = 0.992, standard error = 0.0051, p
(5.8)
0.69
Source: Derived from text equation (13). The sample period is 1952:2 through 1972:4. For data sources
and definitions, see appendix.
RTD and RCP are the interest rates on time deposits and commercial paper, respectively.
a. The summations are calculated from data before rounding.
605
StephenM. Goldfeld
variable
Currencywith income as transactionsvariable
Income
RTD
RCP
0.153
-0.020
-0.0045
(5.4)
(1.3)
(1.2)
0.126
(6.2)
0.103
(7.2)
0.082
(7.4)
0.065
-0.018
(2.0)
-0.017
(1.5)
-0.016
(1.8)
-0.016
-0.0047
(2.1)
-0.0047
(2.0)
-0.0044
(2.1)
-0.0039
(6. 1)
0.051
(1 .0)
...
(1 .1)
...
Currencywith consumerexpendituresas
transactionsvariable
Consumer
expenditures
0.247
(3.8)
0.261
(5.4)
0.191
(3.9)
0.036
(0.5)
RTD
RCP
-0.028
-0.0050
(1.6)
-0.012
(0.9)
-0.009
(0.7)
-0.020
(1.1)
(1.1)
-0.0036
(1.3)
-0.0023
(0.8)
-0.0010
(0.2)
.......
(4.4)
0.041
...
.....
...
...
...
.....
...
...
...
...
(3.2)
0.033
...
(2.5)
0.029
(2.3)
0.028
...
...
...
(2.3)
0.031
...
...
.....
...
...
...
......
...
...
...
...
(2.6)
0.037
(2.8)
0.046
.....
(2.6)
0.058..........
(2.4)
2 =-0.022
2 =0.883
% = -0.086
(13.4)
(2.8)
(2.7)
R2 = 0.998, standard error = 0.0045, p = 0.97
Z
2 = 0.734
2c -0.069
-0.012
(12.5)
(2.4)
(1.5)
R2 = 0.997, standard error = 0.0048, p = 0.97
606
Income
Money, M1
Demand deposits
Currency
Currencyb
0.68
0.59
0.97
0.68
Almon
RTD&
RCPa
0.16
0.13
0.23
0.06
0.07
0.07
0.04
0.00
Income
0.66
0.58
0.88
0.73
RTD&
RCPa
0.15
0.12
0.09
0.07
0.07
0.07
0.02
0.01
Sources: Koyck. equation (4); Almon, equation (13). RTD and RCP are the interest rates on time deposits and commercial paper, respectively.
a. All interest elasticities are negative.
b. Currencyequation using consumer expendituresas a transactions variable.
Currencyplus demanddeposits, Ml
Number
Almon
Almon
of
quarters
Koyck
Income
RTD
RCP
Koyck
Income
RTD
RCP
1
2
3
4
7
10
28.3
48.6
63.0
73.5
90.2
96.3
22.2
40.3
54.6
65.7
85.1
93.5
19.3
42.1
65.5
86.2
100.0
100.0
20.5
41.2
58.8
75.0
100.0
100.0
30.7
51.9
66.7
76.9
92.3
97.3
22.7
40.9
55.1
66.0
84.2
92.5
19.8
45.4
71.9
95.0
100.0
100.0
19.2
38.4
56.2
72.6
100.0
100.0
Dependent variable
Currencywith income as transactionsvariable
Currencywith consumerexpendituresas
transactionsvariable
Almon
Almon
1
2
3
4
7
10
Koyck
Income
RTD
RCP
19.6
35.3
48.0
58.2
78.2
88.7
17.3
31.6
43.3
52.6
70.4
80.6
23.2
44.2
70.0
82.6
100.0
100.0
20.5
41.8
62.2
82.2
100.0
100.0
Consumer
Koyck expenditures
40.9
65.1
79.4
87.4
97.5
99.5
33.7
69.2
95.2
100.0
100.0
100.0
RTD
40.6
58.0
71.0
100.0
100.0
100.0
RCP
41.7
71.7
90.9
100.0
100.0
100.0
Sources: Same as Table 9. RTD and RCP are the interest rates on time deposits and commercial paper,
respectively.
Stephen M. Goldfeld
607
608
writingson demand-for-money
functionsin the Chicagotradition,money
servesas an alternativefor physicalgoods, and the expectedrate of price
changeis given a prominentrole.50This approachhas beenbuttressedby
empiricalevidencefrom hyperinflationsabroad.In view of these latter
findings,HarryJohnsoncalls the absenceof "Americanevidencethat the
expectedrateof changeof pricesentersthe demandfor moneyfunction...
somethingof a puzzle."'51
He tentativelyattributesit to the relativemildness of U.S. inflationsand to the possiblepresenceof thresholdeffects.52
In the spiritof empiricismof this paperandin light of the divergenceof
opinionjust cited,the performanceof expectedinflationvariablesin money
demandequationswill be given a brieflook. Followingone of manypossible routes, I shall modify equation(7) to include an expectedrate of
inflation,pe:
(7T)
cInm,_1 +dln
RTDt
+ e ln RCPt + f ln (P1/P,_i).
The resultsof estimatingequation(14) are given in the firstrow of Table 11. The pricevariableis quite significantlynegativeand its inclusion
raisesthe elasticityfor incomeandlowersthe speedof adjustmentas comparedwith equation(4). The elasticitiesfor the interestrate variablesremain virtuallythe same. (The measuresin rows 2 and 3 are considered
afterthe discussionof Table 12.)
50. See, for example, the various studies in Milton Friedman (ed.), Studies in the
QuantityTheoryof Money(Universityof Chicago Press, 1956).
51. HarryG. Johnson, Macroeconomicsand MonetaryTheory(Aldine, 1972), p. 127.
52. Also relevanthere is the notion of Allais that people will pay more attention to
currentand less to past events the more rapidlythe currentsituationis changing.This
suggeststhat one needs more than a simple distributedlag of past rates of inflationto
measureexpectedinflation.See MauriceAllais, "A Restatementof the QuantityTheory
of Money," AmericanEconomicReview,Vol. 56 (December 1966), pp. 1123-57.
53. The functionalform for the expectedinflationterm in (14) is equivalentto using
APt/Pi-, directlywithout logarithms.This is so since
ln (P/Pt1)
In
APt/Ptgi.
The regressionsreportedbelow were,in fact, estimatedboth as shown and with APg/Ptas a variableand the resultswere identicalto three decimal places.
609
Stephen M. Goldfeld
Money
lagged
Tiune Commercial
paper
deposits
Price
variable
R2
Equation (14)
0.166
(4.9)
0.782
(13.1)
-0.038
(3.6)
-0.015
(5.0)
-0.657
(4.2)
0.996
0.46
de Menil I
0.200
(5.6)
0.698
(11.3)
-0.046
(4.1)
-0.016
(4.9)
-0.143
(1.9)
0.996
0.41
de Menil II
0.200
(5.6)
0.693
(11. 1)
-0.044
(4.0)
-0.016
(4.8)
-0.211
(1.8)
0.996
0.41
Measure
Sources: Row 1 gives the results of estimating equation (14) as derived in the text, defining the expected
rate of inflation by an adaptive expectations mechanism. In rows 2 and 3, direct measures of price expectations from series constructed from surveys of expected price performanceare substituted in equation (14).
The series are from G. de Menil, "Rationality in Popular Price Expectations"(Princeton University, August
1973; processed). For other data sources, see appendix.
610
Real
1
2
3
4
5
6
7
8
0.4
1.0
1.4
1.8
2.1
2.3
2.5
2.6
Interestrates variable
Nominial
6.4
7.0
7.4
7.8
8.1
8.3
8.5
8.6
Real
Nominal
-5.7
-3.8
-2.3
-1.1
-0.2
0.5
1.0
1.5
0.3
2.2
3.7
4.9
5.8
6.5
7.0
7.5
Source: Computed from estimates of equation (14). For the variable interest rate colunis, the interest
rate on time deposits is assumed to rise from 5 percent to 6 percent, and that on commercial paper from 6
perceht to 9 percent.
money growthrates are given in the final two columnsof Table 12, and
reveal more dramaticvariations.At the end of eight quartersthe real
moneystockis about 81/2percentlowerthan it otherwisewouldhave been
and the nominal money stock is 1/2percent lower.
While the specificinflationaryassumptionsand calculationsare unrealistic,the resultsin Table 12 indicatethat substantialshort-runvariations in the growth of money demandmay accompanychangesin inflationaryexpectationsand these in turn may immenselycomplicatethe job
of the monetaryauthorities.
It is also possibleto interpretequation(14) as arisingfrom a partial
adjustmentmodelratherthan fromexpectationallags. To do this requires
modifyingthe equationdefiningthe desiredstock of money-for example,
(2) above-to includethe anticipatedrate of inflation:
(2')
m=
7 p
Under this interpretation,however,equation(14) resultsonly in the unlikely event that expectationsare perfectlyaccurate-that is, only if pe
APt/Pt-1.Fortunately,somealternativemeasuresfor pe yield a more satisfactoryinterpretation.In particular,Georgede Menilhas constructedtwo
series of expectedprice performancefrom the annual surveys of inflationaryexpectationsconductedby the SurveyResearchCenterof the Universityof Michigan,that can be used to give a directmeasureof expecta-
StephenM. Goldfeld
611
price coefficients(see Table 11), which barely border on statisticalsignificanceand do not providestrongsupportfor the anticipatedinflation
variable.
In fact,an alternativeview of the stock adjustmentprocesssuggeststhat
(14) is misspecifiedregardlessof how pe is measured.In particular,it may
be more plausibleto combine (2) or (2') with an adjustmentequation
specifiedin nominalterms:
(3")
ln M,
In M,zl
y (In M*
In M1-),
612
Measure
Income
Time
deposits
Commercial
paper
Equation (17)
0.693
(16.7)
-0.157
(8.9)
-0.062
(4.8)
de Menil
0.652
(17.6)
-0.144
(9.1)
de Menil II
0.641
(17.9)
-0.138
(8.9)
Price
level
R2
Standard
error
-1.911&
(2.1)
0.996
0.0044
0.84
-0.066
(5.1)
-0.088
(1.1)
0.995
0.0046
0.81
-0.064
(5.2)
-0.257
(2.1)
0.995
0.0045
0.80
Sources: Row 1 gives the results of estimating equation (16), as derivedin the text, with Almon distributed
lags (equation 17). In rows 2 and 3, direct measures of price expectations from de Menil (cited in Table 11),
are substituted in equation (16). For other data sources and definitions, see appendix.
a. Individual coefficients are as follows:
Lag
Coefficient
-0.607
(3.2)
-0.440
(2.2)
-0.311
(1.4)
-0.222
(1.0)
-0.172
(1.0)
-0.160
(1.1)
the lagged money stock out of the equation and removingthe possible
statisticalartifactjust cited. The relevantestimatingequationis
n2
ni
(16) ln m =k +
wi In y,-i +
i=0
E
i3O
'
ln RTDt-i
ns
(17)
pe
wi"' ln (Pt_t/Pt--1).
i=o
StephenM. Goldfe(d
613
Table 13, note a) in whichthe lengthof the lag for past ratesof inflation
is slightlyshorterthanthat for interestratesandconsiderablyshorterthan
the incomelag.59
Takentogether,these resultsare a mixedbag. Under the expectations
view, some case emergesfor includinga measureof expectedinflationin
the demandfor money.On the otherhandthe partialadjustmentview, at
least as amended,suggeststhat this case may rest merelyon a statistical
curiosity.The readershouldfeel free to indulgehis own prejudices.
614
Money
lagged
Time Conmmercial
deposits
paper
Income
0.920
(25.4)
-0.027
(2.5)
-0.015
(4.2)
...
0.104
(3.9)
0.986
(30.7)
-0.005
(0.5)
-0.010
(2.9)
...
0.040
(1.5)
0.801
(12.5)
-0.031
(2.7)
-0.014
(4.1)
0.139
(3.6)
0.729
(11.4)
-0.049
(4.2)
-0.018
(5.7)
0.165
(3.8)
0.801
(12.5)
-0.031
(2.5)
-0.014
(4.1)
0.140
(3.3)
Wealth
Changein
wealth
0.52
0.995
0.201
(3.2)
0.39
0.995
...
0.160
(2.9)
0.35
0.996
0.032
(1. 1)
...
0.43
0.995
0.161
(2.7)
0.35
0.996
-0.001
(0.04)
...
Source: Derived from variants of the basic money demand equation (4). For data sources and definitions,
see appendix.
615
Stephen M. Goldfeld
Wealthonly
Ex post
End
pointa
Full
Fourquarter
Sample
period
Full
Fourquarter
Sample
period
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
9.84
5.89
2.68
1.53
1.67
1.95
2.35
1.67
1.81
1.81
1.62
2.75
0.96
0.84
0.72
1.10
0.41
0.94
1.04
2.35
0.90
1.62
0.49
0.85
0.95
0.99
0.94
1.02
1.03
1.00
1.03
1.08
1.10
17.57
16.38
11.00
8.21
5.47
7.10
5.77
3.49
4.67
1.57
1.30
3.53
2.42
1.17
0.65
0.73
2.36
2.16
0.50
4.57
0.81
1.30
0.93
1.40
1.95
2.16
2.24
2.19
2.32
2.34
2.38
2.50
2.53
tn
tn
(N
ON
ti
IR
t
Iti
IRT
o
Q
. 0
lto
r"
%O
*0
*o
~~~~~~~~~~~~~~
;:
t i
~~~C
;~~~~~
{ |
gP,
a~~~~~C
0 -
~c
c;
o.
'
>
E~~N00
*;~~~~~~~~~C
t}
m W m
tFoN=NWX
~N
el)e
"TC
en
***
O "t O)
t
o
.wl
Xo
m 4i%
C'
So
c N c'1
C) WI
oN^@o
tORXmW
~~~~~~~~~~~~~~~~~~~~~~~0
Oo~~~~~~7
N R m WOWWoto
StephenM. Goldfeld
617
SomeEconometricIssues
The previoustwo sectionsconsidereda numberof basicproblemsin the
specificationof the money demandfunction.The presentsection focuses
on a somewhatnarrowerandmoretechnicalset of issuesand considersin
sequencequestions(7) through(10) posed at the beginningof the paper.
ALTERNATIVE INTEREST RATES
00
%D
en
N
re4
o
C;
^
q
o
X
^
?
w0
cs
D
oy
X
^~~~~~OC
ooO
o~~~C
oy
N
oy
oy14
IW
N _
ON m o
oto,to^
t,C'
-C
E~~~~C
It
C;
*~~~~~%
IQ 00
s t.g
V-
-C
-0~
ci
St b.o
0F
o
'4-
4-i
Q
.>
ko
o
.
X,
_
oo14
X~~~~~~~~~~~~~~~,
.E
P-"jXg
8
io
g~~C
c
._;
StephenM. Goldfeld
619
O.
PC
(f*e0~
E
0O
-- '.
o~*
Eo40
00
O~~~O\
cq
1~) 06
i,
00)
r,
,O.
0r
.
0~~~~~~~~~~~~~~~~~~~~~~~~~u
U,
Ot.
'.4-
X~~~~~~~
,
i
Su
0k
'
B~~
J0I
StephenM. Goldfeld
621
622
Two-stagecorrectedleast squares
Ex post
Ex post
End
Sample
Four-
Sample
Four-
points'
period
quarter
Full
period
quarter
Full
1.12
1.19
1.35
1.46
1.44
1.50
1.47
1.46
1.46
1.48
1.52
1.33
1.98
1.86
0.90
1.92
0.60
1.85
1.36
1.48
1.21
0.60
6.37
5.39
2.12
1.61
1.48
2.33
2.61
1.84
1.77
0.91
0.60
0.81
0.86
0.91
0.92
0.85
1.11
0.99
0.99
1.03
1.11
1.11
1.87
1.21
0.45
1.54
2.16
1.20
1.44
0.79
2.18
1.08
1.38
3.32
1.57
2.61
3.25
1.95
2.93
2.22
1.32
1.61
1.44
1.38
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Source: Derived from dynamic simulations using the techniques of Table 18.
a. See Table 2, note a.
623
Stephen M. Goldfeld
(1.1)
(3.5)
(3.0)
+ 2.761 ln y
(2.5)
0.280 In RTD.
(0.8)
(2.1)
(4.7)
(2.2)
+ 12.197 n y
(3.7)
R2
3.135 In RTD.
(3.0)
624
(k Y/2r),
-k
[p
p/2r],
1
or
(22)
(k'y/2r) is
lnm=a+blny+clnr.
StephenM. Goldfeld
625
ln m=a
+ b ln y + c ln r + dln P,
(25)
clnr+
dln(POP).
0.272 + 0.193 ln y
(1.6)
(5.3)
0.019 In RCP
(5.9)
0.045 ln RTD
(3.8)
(1.8)
(5.1)
0.019 ln RCP
(6.2)
+ 0.707ln m,
(11.3)
0.033 ln RTD
(2.3)
-
0.133 ln (POP).
(1.2)
626
A numberof resultsreportedin the last two sectionssuggestedthe desirabilityof greaterdisaggregationof moneyholdingsby type of asset(such
as currencyanddemanddeposits).I shallnow exploredisaggregationwith
respectto typeof holder,usingflow of fundsdata,compiledby the Federal
Reserve,that disaggregatemoneyholdingsinto the followingbroadcategories:households;business;state and local governments;financialsectors; rest of the world;and mail float.
Ideally,each of these componentsshouldbe analyzedin the context of
a completemodel of the determinationof assets and liabilitiesfor each
type of holder,so as to yield a clearpictureof the appropriateexplanatory
variablesand permit systematicuse of balance sheet constraints.This,
however,is a task for an armyof econometricians(one has alreadybeen
mobilized,in fact). Withinthe scope of this paper,it is possiblemerelyto
explore component money holdings with some rough and ready adhockery.
Thenatureof the ventureis clarifiedby the basicdataon moneyholdings
at the end of 1972:77
Sector
Business(includingfloat)
Household
State and local government
Financial
Rest of the world
All sectors
Dollars
(billions)
Percent
of
total
Percent
change,
1952-72
72.3
156.5
14.6
17.0
7.8
27.0
58.3
5.4
6.3
2.9
36.6
152.3
102.8
151.5
309.0
268.3
100.0
105.0
627
Stephen M. Goldfeld
Business
Household
-0.11
State and
local
government
-0.03
-0.14
Financial
-0.06
0.25
-0.19
Rest
of the
world
-0.09
-0.05
0.09
0.06
This result again suggeststhat disaggregatingby holder should pay off.
Disaggregationwill not be a simplematter,however.The firstproblem
lies in the qualityof the data.In recentyearsthe FederalReservehas conducteda surveyon the ownershipof demanddepositsby type of holder.78
Attemptsto reconcilethesedata with the flow of fundsdata haverevealed
a numberof discrepancies
that raiseseriousquestionsaboutthe qualityof
the flow of fundsdata in generaland the allocationbetweenbusinessand
householdsin particular.Judgingby the survey,the flow of funds data
understatebusinessholdingsand overstatehouseholdholdingsof money.
Eventakingthe dataat facevalue,a numberof otherclueswarnthatthe
analysisof sectoralmoney holdingsmay be complicated.Whenthe total
percentagegrowthin the variouscomponentsfromthe end of 1952to the
end of 1972 is comparedwith the growth in the transactionsvariables
relevantfor each sector, some markeddifferencesemerge.For example,
businesstransactionsarenearlythreetimestheir 1972level(if measuredby
businesssales) or three and one-halftimes (if measuredby businessoutput), but businessmoney holdingshave increasedby less than one-half.
78. For a good descriptionof the surveyand a reconciliationwith both the conventional money stock data and the flow of funds data, see "Surveyof Demand Deposit
Ownership,"FederalReserveBulletin,Vol. 57 (June 1971), pp. 456-67.
628
Time Commercial
deposits
paper
-0.055
-0.025
GNP
0.312
Consumer
expendi- Change in
tures
net worth
R2
Standard
error
...
...
0.991
0.013
-0.20
...
0.230
(2.0)
0.992
0.012
-0.27
(11.5)
(3.3)
(4.5)
(4.4)
0.784
(12.6)
-0.044
(2.7)
-0.017
(2.7)
0.251
(3.6)
0.796
(12.3)
-0.045
(2.5)
-0.021
(3.7)
...
0.249
(3.5)
...
0.992
0.013
-0 15
0.844
(13.8)
-0.033
(2.0)
-0.013
(2.1)
...
0.187
(3.7)
0.260
(2.2)
0.993
0.013
-0.24
Sources: Based on flow of funds data from the Board of Governors of the Federal Reserve System. See
the appendix for specific information on data used.
a. The period of fit is 1952:2 to 1972:4. The equations are estimated in logarithmic form by ordinary
least squares, with a correction for serial correlation, and use the Koyck lag specification.
StephenM. Goldfeld
629
0.016In RCP.
(2.3)
630
Treasury
bill rate
0.698
-0.014
Deposits
0.154
(8.5)
(1.6)
(4.0)
(1.6)
0.659
(8.1)
-0.016
(1.9)
0.179
(4.5)
1.429
(2.9)
R2
Standard
error
...
0.995
0.018
0.12
0.066
(2.2)
0.995
0.018
0.04
a. See sources and note for Table 20. The equations are in undeflated form.
b. Ratio of the Treasury bill rate to the saving deposit rate after 1968:3, and zero before.
For this sector,the appropriatescale variableis a measureof depositactivity.The level of depositsandthe changein depositsusedjointlyworked
relativelywell.Two suchequationsusingthesevariablesaregivenin Table
21. The firstemploysthese variablesin conjunctionwith the Treasurybill
rate whilethe secondadds a variabledesignedto capturethe anticipated
Thisvariableis definedas the
outflowof depositsdueto disintermediation.
ratio of the Treasurybill rate to the savingdepositrate after 1968:3and
zero before.The higherthis variablethe morefinancialinstitutionsexpect
andthe moreliquidthey therefore
to lose fundsthroughdisintermediation
wish to be. This variableobtainsthe expectedpositivesign and is statisticallysignificantat the 5 percentlevel.Onthe whole,then,moneyholdings
by the financialsectorappearto lend themselvesto a reasonablystraightforwardexplanation.82
0.022 In RCP,
(1.0)
StephlenM. Goldfeld
631
Component equations
Ex post
Ex post
End
point"
Full
Fourquarter
Withinsample
Full
Fourquarter
Withinsample
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
7.21
4.54
2.33
3.70
3.50
2.15
2.23
2.82
2.94
3.83
3.30
2.07
1.28
2.04
0.67
2.93
1.08
1.80
1.59
1.86
1.99
3.30
0.73
0.87
0.95
1.06
0.99
1.15
1.09
1.12
1.13
1.17
1.18
18.71
17.41
14.95
3.59
2.96
3.44
4.51
6.77
5.11
6.29
3.84
2.60
1.03
3.03
1.03
1.15
2.03
1.40
1.98
1.54
3.20
3.84
1.19
1.20
1.32
1.66
1.60
1.65
1.55
1.51
1.69
1.69
1.89
Sources: See sources and note for Table 20. The aggregate equation corresponds to the aggregate flow of
funds equation in Table 17. The component equations used are (26) for the business sector, (27) for the state
and local governmentsector, the first equation in Table 21 for the financial sector, and the fourth in Table 20
for the household sector. Money holdings for the rest of the world were considered exogenous.
a. See Table 2, note a.
632
Remarks
Concluding
In the processof sequentiallyexaminingeach of the questionsset forth
at the beginningof this paper,a considerableamountof informationhas
emergedconcerningthe nature of the demandfor money. This section
enumeratesthe highlightsof the findings,attemptsto illuminatethem by
examiningvelocity,both actualand simulated,undera varietyof assumptions, and brieflyassessesthe demandfor moneythrough1974.
Perhapsmost interestingis the apparentsturdinessof a quite conventional formulationof the money demandfunction,howeverscrutinized.
Moreparticularly,sucha functionyieldssensibleinterestandincomeelasticities.Theincomeelasticityappearsto be significantlyless thanunityand
canbe pinneddownreasonablywellon the basisof quarterlydata.In addition, the conventionalequationexhibitsno markedinstabilities,in either
the shortrun or the long run. Finally,the conventionalequationyields a
reasonablespeedof adjustmentto changesin incomeor interestrates,with
patternsand magnitudesof adjustmentthat are generallysimilarin the
Koyck and Almon specifications.
Whilethe conventionalequationperformswell,it is neverthelesspossible
to improveon it in a numberof ways.In the firstinstancedisaggregationof
M1 into currencyand demanddeposits appearsdesirablefrom both a
structuraland a forecastingpoint of view.Aggregationto the level of M2,
84. The equationsused in these calculationswere (26) and (27), the first equation in
Table 21, and the fourthin Table 20. Money holdingsof the rest of the worldwere taken
as exogenous. Furthermore,the results were made comparable with those reported
earlier by reinflatingthe component forecasts(where necessary)and then deflating by
the GNP deflator.
633
StephenM. Goldfeld
Furthermore,the additionof a
however,is definitelycounterproductive.
numberof variablesappearsto improvethe performanceof the standard
formulation.Theseincludethe changein wealthand, possibly,a variable
inflationexpectations.Onthe otherhand,substitutionof wealth
measuring
for income imposes a markeddeteriorationin the performanceof the
equation.
Finally,whilethe diversesectoralpatternof movementsin moneyholdings exhibitedby the flow of funds data impliedsome payoff to greater
disaggregation,
effortsin this directionwereonly partiallysuccessful.The
tentativenatureof the resultssuggeststhat this remainsan open issue.
THE BEHAVIOR OF VELOCITY
An empiricalmoney demandfunctionhas implicationsabout the behaviorof the incomevelocityof money,v = y/m. One importantimplication, long debatedby economists,concernsthe sensitivityof v to interest
ratechanges,whichis simplythe otherside of the coin of the debateconcerningthe interestelasticityof the demandfor money. The resultshere
havereconfirmed
the importanceof interestratevariablesin explainingthe
demandfor money,andtheirimplicationsfor the behaviorof velocityhelp
to put theirimportancein perspective.
The basicmoney demandfunctionestimatedabove can be written(in
nonlogarithmic
form)as
m = Ayarb,
whichyields
v = y/m = yl-a/Arb
Thisequationimpliesthat, with a constantinterestrate, velocitywill increaseat the fraction(1 - a) of the growthrate of y. With a valueof a of
about0.7, annualgrowthin y of 4 percentwould lead to a 1.2 percent
growthin v. Since 1952,v has actuallyincreasedat about21/2percentper
year;the excessover 1.2 reflectsthe upwardtrendin interestrates.85
Whilevelocityhas trendedupward,its path has hardlybeen steady,as
theserieslabeled"actualv"in Figure2 readilydemonstratesfor the period
1968:1to 1973:2.To assessthe sensitivityof velocityto alternativepaths
85. Velocity(definedon the basis of MI) has risen from about 2% in 1952 to nearly
5 in 1973.
634
BrookingsPaperson EconomicActivity,3:1973
101~~
Smooth y,
actual r.
4.8
4.7
Actiialy,
I/
;._.fiactual
.7
SmZSoothy,
4.6
r
~~~conistanit
.>
-i"v
4.5
/,,,-w
contstantr
//
/
-Actital
4.4
--
1968
1969
1970
1971
1972
StephenM. Goldfeld
635
. E
M46)It
,0
|6
;~~~~~~~0
0a
tQ
o6)
'
'
>
Cs~~~~~%
E-
O mN
%
s^%6
637
StephenM. Goldfeld
1973:3
5.0
7.4
1973:4
2.7
7.3
1974:1
1.8
6.2
1974:2
1.3
5.1
1974:3
1.6
4.9
1974:4
3.1
4.6
638
APPENDIX
Data Sources
used in this paperare in billions and are seasonally
adjusted.The flow data are at annualrates.The interestrate variablesare
in percentagepointsand arenot seasonallyadjusted.Grossnationalproductandrelatedvariablesarebasedon the July1973revisionsof the national
income accounts(publishedin the Surveyof CurrentBusiness)while the
flow of funds data are based on the August 1973 revisions.Although
readilyavailablein publishedsources,many of the seriesused wereactually taken from the data deck of the FederalReserve-MIT-Pennsylvania
(FMP)EconometricModel.This was generouslysuppliedby JaredEnzler
of the Boardof Governors,FederalReserveSystem.Theflowof fundsdata
neededfor this studyand helpfulcommentsabouttheiruse weresupplied
by StephenT. Taylor,also of the Boardof Governors.
ALL DOLLAR DATA
Commentsand
Discussion
James Duesenberry:StephenGoldfeld has written a very fine paper, a
thoroughpiece of workthat reallymoves us aheadin the field.I do have
severalcomments,thoughthey shouldnot be classifiedas criticisms.
First, I hope that the econometriciansamong us will note Goldfeld's
methodof choosingamongequations.He does not relyprimarilyon small
differencesin R2s or on the t-statisticsof additionalvariables;instead,he
comparesthe successin forecastingmoney demandof simulationsrun on
alternateequations.WhileI know of no formaltheorythat tells us how to
assesssuchevidence,I feelthatthe use of thistechniqueis one of the merits
of Goldfeld'swork.On the whole,Goldfeldhas gone aboutas far as possible in extractinginformationfrom this body of aggregatedata, short of
takingit down to the cellarand beatingit with a rubberhose. The next
majorstepsin researchin this areashouldprobablytry to incorporateinformationfrom sourcesother than time serieson the structureof money
demand,and to employBayesianmethodsto evaluatethe time seriesdata.
Withregardto the substanceof the paper,I was somewhatdisturbedby
the resultson the businessdemandfor money.The database usedin these
disaggregatedequationsis weak: seriousmeasurementerrorsarisein the
attemptto breakdown ownershipof demanddepositsand currencyinto
householdand businesscategories.Moreover,some confusionmay arise
fromthe effectsof compensatingbalances,whichare includedin the measurementof businessholdings.I thinkthis is an areain whichmicro-level
datamightbe usedto refinethe aggregateequation.However,the successof
the demandequationwith householddata leads one to believe that the
failureof the businessdemandequationmaybe dueto a basicdifferencein
the responseof businessdemandto changesin incomeand interestrates.
Thatdifferencemay show up in the resultsof the aggregateequationand
may accountfor the estimatedlong-runincome elasticityof moneyholdings of 0.68, againsta valuenearunityfor the householdsector.
639
640
Stephen M. Goldfeld
641
642
Stephen M. Goldfeld
643
and indeed it did display a gradual updrift between 1920 and 1950. Thereafter, the ratio does not exhibit the continued rise that would be expected
on the basis of the strong increase in real income in the postwar period. The
equations attributethe puzzle to increases in the interest rate, since holdings
of currency show a higher interest elasticity than do demand deposits. But
that differencein interest elasticities is not a plausible result.
The separate equations for currency and demand deposits also raise an
issue about the strategy of monetary policy. They imply that the Federal
Reserve might just as well pursue its monetary policy objectives by setting
a target for the quantity of currency and then adjusting the reserve base as
necessary to provide whatever volume of demand deposits the public desired in conjunction with the targeted volume of currency. I doubt, however, that any economist would believe that such control through currency
alone would represent an adequate way for monetary policy to influence
GNP.
My final point concerns the flow of funds data. The measurement errors
in the flow of funds accounts may be quite large. Estimates of demand
deposits and currency held by the various sectors on December 31, 1972,
were about 6 percent less than the estimate of the sum of currency outstanding and the deposit liabilities of the commercial banks. The discrepancy represents an unknown combination of measurement error and mail
float. Also, the results obtained by disaggregating holdings of households,
corporations, and so forth differ considerably from the results of the new
survey of demand deposit ownership. For these reasons, I doubt that work
with the disaggregated data can prove fruitful; the data are simply not yet
robust enough to stand up to statistical regression techniques.
GeneralDiscussion
Severalparticipantscommented on the statistical problems of Goldfeld's
estimate of the demand for money that uses the stock of money as the dependent variable. William Gibson remarkedthat a complete analysis of the
behavior of the money stock should deal explicitly with responses of the
money supply through the actions of the Federal Reserve. He advocated
using simultaneous estimation techniques to separate the effect of interest
rates on money supply and demand. On some assumptions about the determination of the money supply, Robert Hall argued, the estimation of the
644
BrookingsPaperson EconomicActivity,3:1973
StephenM. Goldfeld
645
646
of persons, and that the latter may be a poor proxy for the former during
the postwar period.
Severalparticipantscommented on the price expectations variable in the
money demand equation. Gibson did not see why the expected rate of inflation should influence the demand for money except through its influence
on the nominal rate of interest. Okun agreed with Gibson's remarks (and
with Poole's earlier comments) insofar as they applied to an Irving Fisher
world in which the full effect of anticipated inflation would be reflected in
nominal interest rates. But Okun and William Brainard suggested that direct substitution of goods for money would alter the story. As Brainardexplained, some people might be more concerned with the allocation of their
wealth between physical and financial assets than with allocation among
various forms of financial assets. If this were the case, the rate of increase of
commodity prices would affect the demand for money, whether or not the
nominal interest rate captured fully the effects of price expectations. Moreover, even with no direct substitution between money and goods, the demand for money could be influenced by price expectations if for any reason
nominal interest rates did not adjust fully to changes in price expectations.
David Fand noted that the extent to which disaggregation is desirable
depends on the reasons for wanting to know a particularmonetary total.
Though it might be possible to get a better estimate of the sum of currency
and demand deposit holdings by estimating these holdings separately,
someone interestedin a differentmonetary total might want to disaggregate
differently,or not at all. Poole questioned the conclusiveness of Goldfeld's
evidence in favor of the disaggregation of money into currencyand demand
deposits, pointing out that the disaggregatedequations using GNP showed
lower ex post mean-squared errors in only five of the eleven cases.
Brainard offered a final comment about Goldfeld's tests. He applauded
Goldfeld's use of out-of-sample forecasts, but he thought the ex post forecasts should give more weight to the accuracy of the estimates for the early
quartersafter the sample period-say, the first four-than to later ones. He
also wondered how well the equations performed in the ex post simulations
as compared to simple naive autoregressive models.