Tests of the functional form, the substitution effect, and the wealth effect of Mexico´s money demand function

Abstract

M1, M2, and M3 demands in Mexico are positively influenced by output and stock prices and negatively associated with the saving rate, the U.S. interest rate, and the expected inflation rate. Peso depreciation affects M1 demand negatively and M2 and M3 demands positively. The log-linear form cannot be rejected for M1 demand and can be rejected for M2 and M3 demands, while the linear form can be rejected for M1, M2, and M3 demands. The CUSUMSQ test shows that M1, M2, and M3 demands are stable; while the CUSUM test indicates stability in M1 and M3 demands and instability in M2 demand.Box-Cox transformation, currency substitution, wealth effect,stability tests