Some further results on the source of shift in M1 demand in the 1980s

What caused the observed shift of M1 demand in the 1980s? Rival candidate explanations stress (1) M1 growth volatility, (2) disinflation, (3) rising real value of stocks, (4) rising volume of financial transactions, (5) rising household financial wealth, and (6) introduction into M1 of interest-bearing checkable deposits. The evidence presented here supports item six only.Money supply

The forecast performance of alternative models of inflation

It is inappropriate to ignore the behavior of money in explaining the generation and evolution of aggregate inflation over time. It is shown that over the period 1977 to 1987 an inflation model based on M2 demand describes more accurately the actual behavior of inflation than an expectations-augmented version of the Phillips curve.Inflation (Finance) ; Money supply ; Forecasting

In search of a stable, short-run M1 demand function

Conventional M1 demand functions reformulated using error-correction and cointegration techniques neither depict parameter stability nor satisfactorily explain short-run changes in M1. Thus, M1 remains unreliable as an indicator variable for monetary policy.Money supply

The tax effect, and the recent behaviours of the after-tax real rate : is it too high?

Concerns that interest rates are too high have been prevalent throughout the 1980s. Even after adjusting for expected inflation, many people argue that real interest rates are inordinately high by historical standards. Yash Mehra, in his article “The Tax Effect and the Recent Behaviour of the After-Tax Real Rate: Is It Too High?”, points out that because interest income is taxed, business decisions are based on the after-tax real rate and public concern should focus on this measure of interest rates. Mehra adds to the accumulating evidence that changes in taxes on interest income alter the nominal interest rate. He suggests that unusual interest rates occurred in the 1970s, when the after-tax real rate was negative because of rising inflation and shocks to the supply side of the economy, such as oil price increases. Today’s real interest rate may appear high relative to the negative levels observed in the ‘70s; however, after-tax real short-term rates in the 1980s have not been significantly higher than they were in the ‘50s and ‘60s.Interest rates

Has M2 demand become unstable?

Standard M2 demand regressions generate prediction errors in 1990, 1991, and 1992 that cumulate to an overprediction of M2 of about 4.2 to 4.3 percent by the second quarter of 1992. These prediction errors are not large and can be accounted for by M2 demand regressions that include a yield curve variable. The yield curve variable captures portfolio substitutions out of M2 into other long-term financial assets such as bond and equity funds.Money supply

In search of a stable, short-run M1 demand function

Conventional M1 demand functions reformulated using error-correction and cointegration techniques neither depict parameter stability nor satisfactorily explain short-run changes in M1. Thus, M1 remains unreliable as an indicator variable for monetary policy.Money supply