Financial Market Risk and U.S. Money Demand

IMF Working Papers, April 1, 2007

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Financial Market Risk and U.S. Money Demand

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Bibliographic details

• Authors: David Cook, Woon Gyu Choi
• Published: April 1, 2007
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451866537.001

Overview

• This paper examines empirically U.S. broad money demand emphasizing the role of financial market risk.
• Authors: David Cook, Woon Gyu Choi.
• Date: April 1, 2007.

Key findings

• Money demand rises with the liquidity risk of stock markets.
• Money demand rises with 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.

Sectoral findings

• Households:
  • 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.
• Businesses:
  • Business money holdings have been consistently (positively) associated with credit risk.

Analysis and approach (as described)

• Empirical examination of U.S. broad money demand emphasizing financial market risk.
• The analysis controls for the effect of financial market risk to assess stability of money demand.
• Sectoral models incorporate transactions costs changes for mutual fund investing in the early 1990s.

Subjects and keywords (as reported)

• Subjects: 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.

Source: IMF Working Paper "Financial Market Risk and U.S. Money Demand" by David Cook and Woon Gyu Choi, April 1, 2007.

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