Financial Market Risk and U.S. Money Demand
April 1, 2007
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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
Pages:
33
Volume:
2007
DOI:
Issue:
089
Series:
Working Paper No. 2007/089
Stock No:
WPIEA2007089
ISBN:
9781451866537
ISSN:
1018-5941
