IMF Working Papers

Financial Market Risk and U.S. Money Demand

By David Cook, Woon Gyu Choi

April 1, 2007

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David Cook, and Woon Gyu Choi. "Financial Market Risk and U.S. Money Demand", IMF Working Papers 2007, 089 (2007), accessed July 8, 2025, https://doi.org/10.5089/9781451866537.001

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines empirically U.S. broad money demand emphasizing the role of financial market risk. We find that money demand rises with the liquidity risk of stock markets or the credit risk of corporate bond markets. After controlling for the effect of financial market risk, money demand becomes relatively stable over the last 35 years. At the sectoral level, household money holdings continue to be stable in a traditional model controlling for a decline in transactions costs for investing in mutual funds in the early 1990s. In contrast, business money holdings have been consistently (positively) associated with credit risk.

Subject: Demand for money, Financial markets, Financial regulation and supervision, Liquidity risk, Market risk, Monetary base, Money, Stock markets

Keywords: Demand for money, DOLS estimator, Europe, Financial market risk, Financial risk, Financial risk model, Liquidity risk, Liquidity risk, Market risk, Monetary base, Money demand, Money holding, Money market mutual funds, Narrow money, Opportunity cost, Regression E, Rows E, Stock market liquidity, Stock markets, WP

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