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Demand for broad money in the UK

journal contribution
posted on 2023-06-08, 07:04 authored by Michael Sumner
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.

History

Publication status

  • Published

Journal

Applied Financial Economics

ISSN

09603107

Publisher

Routledge

Issue

5

Volume

6

Page range

393-399

ISBN

0960-3107

Department affiliated with

  • Economics Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2012-02-06

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