Money demand

Long-run properties of EU-wide money aggregates are analysed. For each of the three aggregates considered -Currency, M1 and M3H -it is possible to obtain cointegrating relationships with GDP and interest rates (long or short term market interest rates). Results are not improved when traditional aggregates, obtained by aggregating existing national aggregates, are extended by the inclusion of various measures of Cross-Border Holdings. Specific attention is also paid to aggregation issues and the relative performance of area-wide and national equations. The results show that aggregation bias is not a major problem and that the relatively good area-wide performance is largely a consequence of a statistical averaging effect.

Fischer (1979) and Asako (1983) analyze the sign of the correlation between the growth rate of money and the rate of capital accumulation on the transition path. Both plug a constant relative risk aversion utility (based on a Cobb–Douglas and a Leontief function, respectively) into Sidrauski's model—yet return contrasting results. The present analysis, by using a more general CES utility, presents both of those settings and conclusions as limiting cases and generates economic figures more consistent with reality (e.g., the interest rate elasticity of the money demands derived from those previous works is necessarily 1 and 0, respectively).

This paper investigates which properties money-demand functions must satisfy so that they are consistent with Lucas's [Lucas, R.E., Jr., 2000. In ‡ation and welfare. Econometrica 68, 247-274] versions of the Sidrauski and the shopping-time models. We conclude that shopping-time-integrable money-demand functions are necessarily also Sidrauski-integrable, but that the converse is not necessarily true, unless a boundedness assumption on the nominal interest rate is made. Both the log-log with an interest-rate elasticity greater than or equal to one and the semi-log money demands may serve as counterexamples. All the models and results are also extended to the case in which there are several assets in the economy performing monetary functions.

The paper explored the role of financial inclusion in the nexus between the demand for money and financial innovation. Previous studies ignored the role of financial inclusion within this nexus and the paper contributes to the literature in this regard. Annual data from 2004 to 2021 on 26 African countries were selected using the Two-Step System GMM method. The findings show that financial inclusion does not mediate the relationship between financial innovation and money demand. Since financial inclusion does not change the nexus between financial innovation and money demand, the research suggests using financial innovation on a huge scale to increase financial access, financial usage, and financial penetration-proxies for financial inclusion-to integrate the unbanked and underbanked into the formal economy. If these developments are to increase money demand, they must be accompanied by the wider availability of financial services at reduced transaction costs and improved service offerings.

Since January 1994, many banks in the United States have initiated retail-deposit sweep programs which reduce statutory reserve requirements by re-labeling transaction deposits as money market deposit accounts. As a result, approximately half of aggregate transaction deposits are now excluded from M1. This re-labeling is invisible to customers and, hence, cannot affect their demand for transaction balances. Nevertheless, a recent article in this Journal explored the effect of this invisible re-labling on M1 demand. This note emphasizes that those results are spurious, and offers additional examples of measurement distortions due to retail deposit sweep activity.

In the money demand literature the Linear Quadratic Adjustment Cost (LQAC) model is often considered to explain the observed slow adjustment in agents' money holdings. In this paper we propose a new method of estimating and testing the LQAC model of money demand. In an empirical application to U.K. money demand, we reject the LQAC model defined from a loss function expressed in terms of real money balances. This is in sharp contrast to the results obtained by Cuthbertson and Taylor (1990) in a previous article in this journal using similar techniques on an equivalent data set. In order to explain the discrepancies we point out some pitfalls in the empirical methodology adopted by Cuthbertson and Taylor. We also consider a specification of the LQAC model in terms of nominal money and, despite statistical rejection, we find that if the LQAC model should have any empirical content such a specification should be preferred to the real money specification.

This survey provides a detailed description of some of the recent theoretical and empirical literature on rational expectations econometrics. The survey pays special attention to non–stationarity of the data, and to the various methods for evaluating rational expectations models that have been developed as alternatives to the classical statistical approach of testing overidentifying restrictions. These methods have become very popular and widely used in empirical research. We provide an illustration using Danish stock market data, and we summarize the many results obtained recently using these measures in areas as diverse as stock prices, the term structure of interest rates, exchange rates, consumption and saving, the balance of payments, tax–smoothing, hyperinflation, and linear quadratic adjustment cost models for inventories, labour demand, and money demand.

This paper derives a method for estimating and testing the Linear Quadratic Adjustment Cost (LQAC) model when the target variable and some of the forcing variables follow I(2) processes. Based on a forward-looking error-correction formulation of the model it is shown how to obtain strongly consistent estimates of the structural long-run parameters and the adjustment cost parameter from both a linear and a non-linear cointegrating regression, where first-differences of the I(2) variables are included as regressors (multicointegration). Further, based on the estimated parameter values, it is shown how to test and evaluate the LQAC model using a VAR approach. In an empirical application using UK money demand data, the non-linear multicointegrating regression delivers an economically plausible estimate of the adjustment cost parameter. However, the exact restrictions implied by the LQAC model under rational expectations are strongly rejected.

The quantity theory of money is a term evocation of a general approach rather than a label for a well-defined theory». M. Friedman, The Quantity Theory of Money: a restatement, 1956 Avec David Ricardo 2 la théorie quantitative de la monnaie a atteint sa plénitude. L'analyse dichotomique lui permettra de ne prendre que les seuls effets de la monnaie sur les prix sans qu'elle soit affectée par les facteurs réels. On a pu répondre à Cantillon 3 , sur le besoin d'un processus dynamique, et retenir le résultat déjà avancé par Bodin 4 . De toute façon, la théorie quantitative de la monnaie était prise au niveau de sa neutralité et pas encore au niveau de la super-neutralité 5 . La première se référant à un changement de la quantité de monnaie dans un état d'équilibre stationnaire 6 et la deuxième aux changements du taux de croissance de l'offre de monnaie dans une économie en croissance. Wicksell 7 finira par accepter la théorie quantitative de la monnaie et laissera tomber la dichotomie. L'abandon de la dichotomie et ainsi du postulat de l'homogénéité 8 ont crée les fondements de la moderne théorie monétaire 9 . Après le travail de Sims 10 les qualificatifs trop simplistes appliqués à l'analyse macro-économique ne sont plus ce qu'ils étaient auparavant. Et on ira profiter pour classifier cette étude de monétariste 11 . Cependant, d'un monétarisme qui n'accepte pas la neutralité de la monnaie comme un postulat. 1 Je remercie mon collègue Pedro Bação par ses suggestions et corrections. Les échanges d'opinion on donné naissance à une étude de Pedro Bação sur les calculs de co-intégration des différents programmes économétriques. Bação (1999). 2 Ricardo (1810-11). 3 Cantillon (1755). 4 Bodin (1568). 5 Patinkin (1987). Voir aussi Barro (1984), pp. 559 et 563. 6 "Il est donc certain que toute augmentation ou diminution de la quantité de la marchandise-monnaie a pour effect une augmentation ou diminution sensiblement proportionnelle dans les prix" (p. 273). Walras (1900). 7 Wicksell (1906). 8 Leontief (1936-7). 9 Patinkin (1987). Comme manuel de référence voir [Marchal, 1987 #43]. 10 Sims (1980). 11 Dans le sens déjà présenté par Chaîneau (1982).

An easy and popular method for measuring the size of the underground economy is to use macro-data such as money demand or electricity demand to infer what the legitimate economy needs, and then to attribute the remaining consumption to the underground economy. Such inferences rely on the stability of parameters of the money demand and electricity demand equations, or at the very least on knowledge of how these parameters are changing. We argue that the pace of change of these parameters (such as velocity) is too variable in transition economies for the above methods of estimating the size of the underground economy to be applicable. We make our point by using the Czech Republic and other transition country data from the financial and electricity sectors.

In this paper, a reserve money demand model is tried to be constructed for the Turkish economy. Using contemporaneous multivariate co-integration methodology for the investigation period 1987Q1-2007Q3 of the quarterly observations, we find that the real income elasticity of money demand is highly greater than unity which means that there exists an ongoing monetization process with regard to the increases in the real income in the economy. The most important alternative cost against the real money holdings seems to be the expected depreciation rate of the domestic currency against the exchange rate. Such a finding reveals the importance of currency substitution phenomenon dominated in the economy when the economic agents determine the motives of demand for monetary balances. Furthermore, a critical finding estimated in the paper is that domestic inflation has a weakly exogenous characteristic in the money demand variable space which requires no dynamic error correction model constructed on domestic inflation as a function of the excess money demand taken place under the money market disequilibrium conditions.

In this paper, a reserve money demand model is tried to be constructed for the Turkish economy. Using contemporaneous multivariate co - integration methodology for the investigation period 1987Q1 - 2007Q3 of the quarterly observations, we find that the real income elasticity of money demand is highly greater than unity which means that there exists an ongoing monetization process with regard to the increases in the real income in the economy. The most important alternative cost against the real money holdings seems to be the expected depreciation rate of the domestic currency against the exchange rate. Such a finding reveals the importance of currency substitution phenomenon dominated in the economy when the economic agents determine the motives of demand for monetary balances. Furthermore, a critical finding estimated in the paper is that domestic inflation has a weakly exogenous characteristic in the money demand variable space which requires no dynamic error correction model cons...

This paper quantifies some of the general equilibrium costs of inflation for the UK, under the assumption that individuals hold cash to economise on 'shopping-time'. It tests whether or not money balances tend to a finite number as nominal interest rates tend to zero, and investigates how sensitive are the welfare implications of rates of inflation above the Friedman rule to this test. The paper then explores how uncertainties about the shape of the money demand curve translate into uncertainties about these welfare costs of inflation. A key uncertainty is the existence of a satiation point for money balances. We show using Monte Carlo tests that without observations at nominal interest rates very close to zero, the power of satiation tests can be very low. This finding may also be important for evaluating how/whether monetary policy could stabilise the economy in the event of a shock large enough to require that nominal interest rates are driven to the region of zero.

The traditional tools of econometric analysis are generally founded on the assumption that the structure of the economy is stable. This is a very restrictive hypothesis when modeling regional economies, since it is difficult to assume that future behaviour will be similar to that observed in the past. The objective of the present work is to investigate the effects of structural change on the process of building regional econometric models, examining how this process deviates from standard econometric practice when the structural relationships are not constant. The method will be illustrated by specifying and estimating an econometric model for Extremadura, a region in SW Spain which has undergone profound changes in its economic structure in the last decade.

The nature of price dynamics has long been thought important for the origin and duration of business cycles. To investigate this topic, we construct a dynamic stochastic general equilibrium macroeconomic model in which monopolistically competitive f?rms face fixed costs of changing the nominal prices of final goods. These prices are thus changed infrequently and discretely. The framework captures major features of the price dynamics stressed by the New Keynesian research program, particularly work on (s,S) pricing rules. However, by treating firms as heterogeneous with respect to the size of fixed costs of price adjustment, we are able to study a wider range of issues than in the prior literature. For example, we explore how the nature of optimal price-setting depends on (i) the extent of persistence of variations in the money stock and (ii) the interest elasticity of money demand. Further, our model can be used to study a wide range of aspects of the positive and normative economics of monetary policy. We illustrate these topics by considering the consequences of changing the rate of inflation and by evaluating alternative policy rules.

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Understanding the money demand function is highly important for monetary policy implementation, especially in a monetary targeting framework. The paper uses cointegration analysis and a reduced-form short-run error correction model to investigate the demand for money in Vietnam between 1999 and 2009. We find evidence for a cointegrating relationship between the real money demand, income, the foreign interest rate, and the real stock price. More importantly, statistical tests show that real money demand in Vietnam is stable in this period.

We estimate the demand for money for monetary aggregates M1 and M2, and cash in Algeria over the period 1979-2019, and study its long-run stability. We show that the transaction motive is significant for all three aggregates, especially for the demand for cash, reflecting the weight of informal economy "practices". The elasticity of the scale variable is very close to unity for M2 and M1, and even equal to unity for cash demand (1.006). The elasticity of inflation is also significant for all three aggregates, although its level is higher in the case of cash demand (-6.474). Despite the persistence of certain financial repression mechanisms, interest rate elasticity is significant for all three aggregates, but higher for M1 and cash. The same observation is made for elasticity of the exchange rate, reflecting the effect of monetary substitution, especially for M1 and cash. Finally, our study concludes that the demand for money in terms of M1 remains stable, the same observation being confirmed for the M2 aggregate. However, the demand for fiat currency proves not to be stable. The consequences for the optimal design of monetary policy in Algeria are clearly stated.

We study an infinite horizon economy with a representative agent whose utility function includes consumption, real balances and leisure. Real balances enter the utility function premultiplied by a parameter reflecting the inverse of the degree of financial market imperfection, i.e. the inverse of the transaction costs justifying the introduction of money in the utility function. When labor is supplied elastically, indeterminacy arises through a transcritical and a flip bifurcation, for degree of financial imperfection arbitrarily close to zero. Similar results are observed when labor is supplied inelastically: indeterminacy occurs through a flip bifurcation for values of the degree of financial imperfection unbounded away from zero. We also study the existence and the multiplicity of the steady states.

We study an infinite horizon economy with a representative agent whose utility function includes consumption, real balances and leisure. Real balances enter the utility function pre-multiplied by a parameter reflecting the inverse of the degree of financial market imperfection, i.e. the inverse of the transaction costs justifying a positively valued fiat money. Indeterminacy arises both through a transcritical and a flip bifurcation: somewhat paradoxically, the amplitude of the indeterminacy region improves as soon as the degree of market imperfection is set lower and lower. Such results are robust with respect to the choice for the elasticity of the labor supply, both when the latter is set close to zero and to infinite. We also provide conditions for the existence, uniqueness and multiplicity of the steady states and, finally, we asses the impact of the degree of market imperfection on the occurrence of such phenomena.

Can the price level be determined by a requirement that taxes should be paid in money? We study this question in a dynamic endowment economy where households have to pay a money tax of a fixed real value and money enters the economy through government expenditures and open market operations. When government expenditures only consist of purchases of real goods, the price level is bounded from above, but not uniquely determined. A unique price level can be obtained if the government also has access to money transfers, and uses these to fix its expenditure level in nominal terms.

The goal of this paper is to explain a recent regularity observed in economies in which central banks have moved from using a money aggregate as the instrument for the conduction of monetary policy towards a short-term interest rate (for example Peru in 2002). In particular, in those ...

RESUMEN: Este trabajo explora en qué medida la perspectiva neo-keynesiana desarrolla un programa de investigación dentro de la visión de la escuela neo-clásica, que rechaza el postkeynesianismo como acientífico; sin embargo, al igual que todos los neo-clásicos, piensa en términos de sistemas cerrados donde existe el equilibrio.

In this paper, a reserve money demand model is tried to be constructed for the Turkish economy. Using contemporaneous multivariate co-integration methodology for the investigation period 1987Q1-2007Q3 of the quarterly observations, we find that the real income elasticity of money demand is highly greater than unity which means that there exists an ongoing monetization process with regard to the increases in the real income in the economy. The most important alternative cost against the real money holdings seems to be the expected depreciation rate of the domestic currency against the exchange rate. Such a finding reveals the importance of currency substitution phenomenon dominated in the economy when the economic agents determine the motives of demand for monetary balances. Furthermore, a critical finding estimated in the paper is that domestic inflation has a weakly exogenous characteristic in the money demand variable space which requires no dynamic error correction model constructed on domestic inflation as a function of the excess money demand taken place under the money market disequilibrium conditions.

A lo largo de la historia del pensamiento económico, y en particular de la macroeconomía, hay dos conceptos que presentan grandes dificultades en la elaboración de modelos y el análisis de sus consecuencias de política: el tiempo y el dinero. El primero se ha enfrentado ...

THE RELATIVE SOPHISTICATION OF FINANCIAL MARKETS in Brazil sets it apart from other developing economies. In the last twenty years, Brazil has proved fertile ground for Elnancial innovations in response to high rates of inflation, reserve requirements, and low or zero nominal interest rate ceilings on conventional bank accounts. These innovations include the rapid growth of relatively unregulated Elnance companies, the emergence of a fledgling equities market, reductions in bank transacting costs through computerization, and the use of bank repurchase agreements as substitutes for conventional deposits (Gelb et al. 1980). Primary and secondary markets for government securities, which also provide the basis for bank repurchase agreements, emerged in the early 1970s as well. These securities provided a convenient source of funds for the government in the face of shrinking money demand as they permitted agents to maintain relatively high yields and liquidity without resort to nonElnancial or foreign assets. Though the availability of treasury bills and indexed bonds contributed to the falling demand for money, the minimum denomination and transaction costs associated with holding and trading these instruments ensured that some agents would retain funds in zero or low-interest accounts. At the same time, those who might have transferred funds out of the domestic Elnancial system, and beyond the reach of the government, were offered relatively attractive alternatives. Thus one can view the creation of these

I study a DSGE model incorporating a monetary transactions technology in which a representative household invests time to improve its skill (human capital) in making transactions. The model is designed to reconcile salient short-and long-run features of the relationship between money, income, and the opportunity cost of holding money. An econometric reduced form, derived analytically, is revealing for the nature of pathologies perceived by the empirical money demand literature; particularly interesting is the possibility of a moving average root close to the unit circle. The impact elasticity of the M1-income ratio to an innovation to the opportunity cost is about 0:1, whereas the long-run response to a unit permanent shift is 1. In comparison to less parsimonious models, parametric restrictions are not rejected, and outof-sample forecasts are improved. The theory also yields implications for the welfare cost of in ‡ation vastly di¤erent from those of standard shopping time models.

Since gaining independence, Morocco has made a commitment to achieving goals aimed at achieving a high rate of economic growth in order to raise the standard of living for its people. As such, this ongoing commitment is based on a strategy that aims to lower the poverty rate and provide a dignified life for those who are vulnerable. However, it is crucial to comprehend the factors that contribute to poverty in order to implement an effective strategy for combating it. In this regard, this article aims to analyze poverty in Morocco through an economic study of the effects of economic growth, education, inflation, and unemployment on the evolution of poverty in Morocco. This study examined the intricate connections between economic growth, inflation, unemployment, and poverty in the Moroccan environment using the ARDL method. Poverty and education are related, both immediately and over time. Initially, the dependent variable and the independent variables do not have a long-term relationship. On the other hand, economic expansion has a statistically significant short-term effect on reducing poverty. however, after making changes to the analysis model, the dependent and independent variables have a significant long-term association. These findings can concentrate efforts on the areas that are most crucial for lowering poverty and improving the standard of living for vulnerable people by identifying the factors that have a substantial impact on poverty. This study contributes to the scientific understanding of the factors influencing poverty in Morocco by using an economic approach.

Usury is a concept often associated more with religiously based financial ethics, whether Christian or Islamic, than with the secular world of contemporary finance. The problem is compounded by a tendency to interpret riba, prohibited within Islam, as both usury and interest, without adequately distinguishing these concepts. This paper argues that in Christian tradition usury has always evoked the notion of money demanded in excess of what is owed on a loan, disrupting a relationship of equality between people, whereas interest was seen as referring to just compensation to the lender. Although it is often claimed that hostility towards 'usury' has been in retreat in the West since the protestant Reformation, we would argue that the crucial break came not with Calvin, but with Jeremy Bentham, whose critique of the arguments of Adam Smith, upholding the reasonableness of the laws against usury, led to the abolition of the usury laws in England in 1854. There has to be a role for law, whether Islamic or secular, in regulating financial relationships. We argue that by retrieving the necessary distinction between demanding usury as illegitimate predatory lending and interest as legitimate compensation, we can discover common ground behind the driving principles of financial ethics within both Islamic and Christian tradition that may still be of relevance today. By re-examining past ethical discussions of the distinction between usury and just compensation, we argue that the world's religious traditions can make significant contributions to contemporary debate.

Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods. Every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of 10 percent instead of 0 inflation increases from 0.1 percent of income with fixed periods to 1 percent with optimal periods. The results are robust to different preferences, to different compositions of income in bonds or money, and to the introduction of capital and labor. (JEL: E30, E40, E50)

The paper presents a comparative analysis of monetary transmission mechanisms and changes in them after the ``second ERM'' in March 1983. The empirical model investigates the determination of money, income, prices, and interest rates in Germany, Denmark, and Italy based on the cointegrated VAR model. It provides empirical results on the macroeconomic e¨ects of joining the ERM and ®nancial deregulation.

The paper investigates the determinants and stability of the income velocity of money while accounting for structural breaks in its approach from the period Q1 1981 to Q4 2023 in Nigeria. The paper extends previous works by accounting for four velocities of money functions having accounted for structural breaks in its approach. The study adopted the Bai and Perron breakpoint test, the Zivot and Andrews, and Perron and Vogelsang structural break unit root tests to determine the break dates and the variables' stationary properties. In analyzing the main results, the study used the quantile ARDL method to establish the determinants of income velocity of money in Nigeria, while it used the CUSUM tests to establish the stability of money velocity in Nigeria. The study found that the determinants of the velocity of money are per capita income, the exchange rate, financial development, inflation, and the interest rate across the four models. Furthermore, the four velocities of money functions were unstable for Nigeria using the cumulative sum and cumulative sum of squares tests. Consequently, the study recommends effective monitoring and the provision of sound monetary policies to ensure a stable and predictable velocity of money. This can be achieved by understanding and focusing on these key determinants and crafting informed strategies to manage economic growth and stability. This holistic approach ensures that the benefits of economic policies are felt broadly across the economy, ultimately bolstering overall financial health and enhancing the velocity of money, which is crucial for sustained economic progress.

During the last two decades of the twentieth century, Brazil went through a sequence of failed stabilization plans that tried to cope with an enduring hyperinflation. This paper uses a money demand model to evaluate monetary policies during those episodes. Consistency between money supply and expected conditional money demand growth rates is considered for each plan. It is shown that unsuccessful programs were marked by excessive liquidity. The results not only suggest that monetary mismanagement led to the failure of the plans, but also that the excessive liquidity could have been predicted.

List of tables List of figures Acknowledgements This study lias benefitted from financial support from the African Economic Research Consortium (AERC.) based in Nairobi. The author is also indebted to comments made on the preliminary findings of the study by various participants in the AERC's workshops. However, the author remains .solely responsible for the views and shortcomings of this study.

The introduction of new financial i'nstruments l and the consequent asset substitutability since the advent of financial deregulation in 1991 has been accompanied by volatility of the money multiplier and the monetary aggregates. While money demand studies exist [Khan (1980)], the modelIing of the supply side of money and, in general, the impact of financial innovations on money multipliers and monetary aggregates has been largely ignored.2 In a recent study, Siddiqui and Waheed (I994a) found that during 1992-93 the narrow money multiplier felI and increased sharply, causing instability in MI. It was also observed that the broad money multiplier showed similar instability during the same period.

THE RELATIVE SOPHISTICATION OF FINANCIAL MARKETS in Brazil sets it apart from other developing economies. In the last twenty years, Brazil has proved fertile ground for Elnancial innovations in response to high rates of inflation, reserve requirements, and low or zero nominal interest rate ceilings on conventional bank accounts. These innovations include the rapid growth of relatively unregulated Elnance companies, the emergence of a fledgling equities market, reductions in bank transacting costs through computerization, and the use of bank repurchase agreements as substitutes for conventional deposits (Gelb et al. 1980). Primary and secondary markets for government securities, which also provide the basis for bank repurchase agreements, emerged in the early 1970s as well. These securities provided a convenient source of funds for the government in the face of shrinking money demand as they permitted agents to maintain relatively high yields and liquidity without resort to nonElnancial or foreign assets. Though the availability of treasury bills and indexed bonds contributed to the falling demand for money, the minimum denomination and transaction costs associated with holding and trading these instruments ensured that some agents would retain funds in zero or low-interest accounts. At the same time, those who might have transferred funds out of the domestic Elnancial system, and beyond the reach of the government, were offered relatively attractive alternatives. Thus one can view the creation of these

This is a Working Paper and the author would weloome any comments on the present text, Citations should refer to a Working Paper of the International Monetary Fund, mentioning the author, and the date of issuance. The views expressed are those of the author and do not necessarily represent those of the Fund.

The paper deals with the problem of defining money in a system with derivatives. We conclude that derivatives have to be included in the definition of money, and support our conclusions with an econometric test on the New York Stock Exchange (NYSE) and Chicago Board of Trade indexes. We focus on the direct relationship between derivatives' supply and the interest rate, the analytical basis of speculative money demand introduced by Keynes and the foundation of the Fratianni-Savona model to single out the international monetary base. Consequently, monetary aggregates measured by international institutions, such as the Bank for International Settlements, underestimate the actual offshore market size. Derivatives are the primary instruments used by speculators. There is money, mainly in reserve currencies, that is not controlled and that may cause systemic instability (e.g., the recent Asian crisis).

An easy and popular method for measuring the size of the underground economy is to use macro-data such as money demand or electricity demand to infer what the legitimate economy needs, and then to attribute the remaining consumption to the underground economy. Such inferences rely on the stability of parameters of the money demand and electricity demand equations, or at the very least on knowledge of how these parameters are changing. We argue that the pace of change of these parameters (such as velocity) is too variable in transition economies for the above methods of estimating the size of the underground economy to be applicable. We make our point by using the Czech Republic and other transition country data from the financial and electricity sectors.

Using several tests for structural stability in regressions with I(1) variables and for the existence of cointegration in models with regime shifts, the empirical evidence on the existence of a structural break in the Spanish long-run demand for broad money (ALP2) is analysed. The results indicate that shifts a¨ecting the demand for ALP2 in recent years have substantially altered its long-run properties. As to the cause of this structural break, emphasis is placed on the role played by the increasing openness of the Spanish ®nancial system to international markets as obstacles to free capital movements have progressively disappeared.

Non-technical summary 1 Introduction 2 Money demand (in)stability in the US, the UK and Japan 3 Money demand stability in the euro area 3.1 Weaker impact of financial innovation in the euro area compared to non-euro area countries 3.2 Factors related to aggregation procedure 3.2.1 The "averaging-out" of desynchronised shocks to national money demand 3.2.2 The internalisation of currency substitution within Europe 3.2.3 The "German size" factor 4 Conclusions References European Central Bank working paper series

This document is a first approach, based on the uruguayan experience, to the relationship between the rate of inflation and its uncertainty. It aims to assess whether the empirical evidence supports the usual belief that higher inflation rates are more difficult to predict. Our estimates allow to build a time profile for period-to-period uncertainty during the last two decades. The analysis of causality supports the usual assumption that higher rates of inflation cause-in Granger's sense-higher levels of uncertainty. RESUMEN Este documento realiza una primera aproximación, con base en la experiencia uruguaya, a las relaciones entre la tasa de inflación y su nivel de incertidumbre. El objetivo es verificar si la evidencia apoya la creencia usual de que tasas más elevadas de inflación dificultan su predictibilidad. Las estimaciones realizadas permiten construir un perfil temporal de la incertidumbre período-a-período durante las últimas dos décadas. El análisis de causalidad sustenta efectivamente la hipótesis de que las tasas más elevadas de inflación causan-en el sentido de Granger-niveles más elevados de incertidumbre.

Este documento contiene algunos ejercicios resueltos sobre los fundamentos microeconómicos de la macroeconomía, la macroeconomía keynesiana con precios fijos, la teoría de la demanda de dinero y el modelo IS-LM en sus versiones estática y dinámica. Los ejercicios son complementados con discusiones teóricas e ilustraciones gráficas. Este es un documento orientado básicamente a apoyar la enseñanza de la macroeconomía.

The paper presents a theory of the demand for money that combines a special case of the shopping time exchange economy with the cash-in-advance framework. The model predicts that both higher inflation and financial innovation -that reduces the cost of credit -induce agents to substitute away from money towards exchange credit. This results in an interest elasticity of money that rises with the inflation rate rather than the constant elasticity found in standard shopping time specifications. A number of the key predictions of the banking time theory are tested using quarterly data for the US and Australia. We find cointegration empirical support for the model, with robustness checks and a comparison to a standard specification.

This paper shows that the collapse of the paper money system of the Ming dynasty (1368-1644) ,was not due to a runaway printing press but due to the existence of competing metallic currencies, which increased the interest elasticity of paper money demand and thus raised the possibility of self-generating hyperinflation. A leaning-with-the-wind feedback rule from prices to money supply" followed by the Southern Sung government (1127-1279), however, seems to have prevented a self-generating inflation from arising. China was the first country to issue paper money, and the first to stop using it. In 1024 the paper money system was established by the Sung dynast?' (960-1279). It was followed by the Mongol regime of the Yuan dynast 2' (1279-1368). Despite the long tradition of using paper money, one and a half centuries after the Sung, the Ming (1368-1644) government abandoned this institution, sometime around 1430. All Chinese historians took it for granted that this abandonment was due to the continued inflation resulting from over-issuance by the government. Gordon Tullock (1957, 405-406), an expert in the field of Chinese paper money history, however, noticed that, unlike the previous dynasties, "the collapse of the Ming currency was not due to a runaway printing press." He was deeply puzzled why the Ming regime gave up its paper money "in the height of its power." All Chinese historical accounts are agreed that paper currencies continued depreciating in the early Ming dynasty until it was completely given up by the government. There is nevertheless little evidence in support of the over-issuance by the government. It is indeed puzzling that an aggressive policy of the governments which increased the rate of money issuance exceeding the rate of depreciation in paper currency should have worked well prior to the Ming, while a tight *The authors are indebted to a referee for his stimulating suggestions and useful eonunents, in form as well as in substance. They are also gratefid to Gordon Tulloek and Ping Wang for their advice and encouragement.

investigación fue realizada en el marco del cumplimiento del objetivo institucional 1.2 del Plan Estratégico del Banco Central del Uruguay para el año 2010. En este trabajo participaron las siguientes Áreas: "Investigaciones Económicas" y "Política Monetaria y Programación Macroeconómica". Los conceptos involucrados en este documento son de estricta responsabilidad de los autores, no comprometiendo por tanto, la opinión institucional del Banco Central del Uruguay. Agradecemos a José

This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial crises of the last century: the Great Depression and Great Recession. V2 is notably affected by risk premia, financial innovation, and major banking regulations. Findings suggest that M2 provides guidance during crises and their unwinding, and that the Fed faces the challenge of not only preventing excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from financial reform.