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This paper was started during N. Watson’s stay at Banco de España as a Research Fellow.

By Olympia Bover, Nadine Watson, Banco De España, Martin Browning, Steve Davies, José Luis Escrivá, Anil Kashyap, Costas Meghir, Eva Ortega, Rafael Repullo, Federico Sáez, Teresa Sastre and The Of

Abstract

We estimate elasticities of scale in the demand for money by firms using firm level panel data from Spain, the UK, and the US. This elasticity is one for Spain and the UK but smaller for the US. We find that the errors in the money demand equations contain two terms that are correlated with sales. Firstly, a permanent firm effect that captures differences in technological sophistication. Secondly, a measurement error in sales, which becomes relevant when relying on changes in sales to account for fixed effects. Failure to control for these correlated unobservable terms results in important biases in the estimated sales elasticities

Topics: firms ’ money demand, measurement error, panel data, technological change
Year: 2004
OAI identifier: oai:CiteSeerX.psu:10.1.1.195.7174
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