Estimating Money Demand Functions

Abstract

THE QUESTION OF which functional forms of money demand regression equations are useful for empirical work is addressed here. Specifically, it is argued that a functional form that focuses attention on the ability of the growth rate of nominal money to predict the inflation rate is a useful way of summarizing empirical evidence on the existence of a stable money demand function. The results of estimating and simulating this functional form as well as standard functional forms are presented in the final part of this paper. A typical equation expressing the public's demand for real money balances (m) is as follows: