The Demand for Money and the Term Structure of Interest Rates

Abstract

It has been argued recently by Friedman that the whole term structure of interest rates rather than any single rate represents the relevant opportunity cost of holding money. The purpose of this paper is to present a way to incorporate the term structure in the demand-for-money function compactly with a few parameters and offer empirical evidence for the United States over the period 1960-76 supporting the validity of such an approach. Furthermore, we establish that this function appeared to be stable during a period (1972-74) when standard functions using only one interest rate display significant shifts in parameters.