Demand for broad money in the UK

Sumner, Michael (1996) Demand for broad money in the UK. Applied Financial Economics, 6 (5). pp. 393-399. ISSN 09603107

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Abstract

The allocation of disposable income between consumers' expenditure and saving dominates GDP in accounting for the scale of demand for broad money (M4), in the qualitative sense of explaining seasonal variations without resort to an implausible extraneous cycle in tastes for holding money, as well as in conventional statistical terms. Both the rates of return on alternative assets and the own-rate on CDs, the highest yielding component of M4, have plausible and well-determined effects on money demand in both the short and long run. The CD rate has markedly greater explanatory power than bank deposit rate, and its non-cointegration with the bond rate accounts for the long-run influence of interest rates. The effect of inflation is identified by its persistence in the error-correction model as an opportunity cost, important for small-scale participants who faced negative pre-tax real returns on deposits during more than half the sample, and not as a manifestation of money illusion.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Economics
Depositing User: Michael Sumner
Date Deposited: 06 Feb 2012 20:37
Last Modified: 10 Jul 2012 11:47
URI: http://sro.sussex.ac.uk/id/eprint/27072
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