Endogenous Money Supply and Money Demand
IMF Working Papers, November 1, 2000
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Bibliographic details
- Authors: Woon Gyu Choi, Seonghwan Oh
- Published: November 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859553.001
Summary and research question
- Paper explores behavior of money demand by explicitly accounting for money supply endogeneity arising from endogenous monetary policy and financial innovations.
- Theoretical analysis indicates that money supply factors matter in the money demand function when the money supply partially responds to money demand.
- Empirical analysis uses U.S. data to evaluate relevance of policy stance to demand for M1 under a regime in which monetary policy is substantially endogenous.
Key empirical findings
- Empirical results with U.S. data provide strong evidence for the relevance of the policy stance to the demand for M1 under a regime in which monetary policy is substantially endogenous.
- Specifically, the authors find that tighter monetary policy has substantial positive impacts on money demand under the recent Federal funds rate targeting.
Methodology and analytical approach
- The paper combines theoretical analysis of money supply endogeneity with empirical estimation using U.S. data.
- Vector autoregression techniques and econometric analysis are used to assess the interaction between money supply endogeneity, monetary policy stance, and money demand.
Policy implications and interpretations
- When monetary policy is substantially endogenous (policy responds to money demand), policy stance is a relevant determinant of money demand.
- Under Federal funds rate targeting, monetary tightening is associated with substantial positive impacts on M1 demand, implying that policy stance should be explicitly considered when modeling money demand.
Content in this bundle
- Endogenous Money Supply and Money Demand - WP/00/188