The Role of Money Supply Shocks in the Short-Run Demand for Money

25 Pages Posted: 28 Dec 2002 Last revised: 9 Dec 2022

See all articles by Jack Carr

Jack Carr

University of Toronto - Department of Economics

Michael R. Darby

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Date Written: July 1980

Abstract

Previous models of the demand for money are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible fluctuations in interest rates in response to unexpected changes in the nominal money supply. This paper proposes a shock-absorber model of money demand in which money supply shocks affect the synchronization of purchases and sales of assets and so engender a temporary desire to hold more or less money than would otherwise be the case. Expected changes in nominal money do not cause fluctuations in real money inventories. The model is simultaneously estimated for the United States, United Kingdom, Canada, France, Germany, Italy, Japan, and the Netherlands using the postwar quarterly data set and instruments used in the Mark III International Transmission Model. The shock-absorber variables significantly improve the estimated short-run money demand functions in every case.

Suggested Citation

Carr, Jack and Darby, Michael R., The Role of Money Supply Shocks in the Short-Run Demand for Money (July 1980). NBER Working Paper No. w0524, Available at SSRN: https://ssrn.com/abstract=263404

Jack Carr

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Michael R. Darby (Contact Author)

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