Summary of WP/93/24: “The Demand for Ml in the United States: A Comment on Baba. Hendry, and Starr”

This compilation of summaries of Working Papers released during January-June 1993 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201

Abstract

This compilation of summaries of Working Papers released during January-June 1993 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201

A 1992 paper by Yoshihisa Baba, David Hendry, and Ross Starr presents a model of the demand for narrowly defined money (Ml) in the United States that shows a dramatic improvement in both fit and stability over earlier models. This note estimates an alternative model that is based on the same data set, uses a similar error-correction methodology, and has very similar statistical properties to the original. Both models show remarkable stability throughout the past three decades.

Two conclusions are that the improvements are due more to the use of complex dynamics than to the introduction of variables representing financial innovation (as alleged by Baba, Hendry, and Starr) and that some of the economic properties are not robust with respect to minor changes in specification. Notably, whereas in the original model, money demand has a low elasticity to real income, which suggests substantial economies of scale in money holdings, this alternative has a unitary elasticity, which suggests that money and income should grow proportionately in the long run.

Working Paper Summaries (WP/93/1 - WP/93/54)
Author: International Monetary Fund