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Demand for broad money in the UK
journal contribution
posted on 2023-06-08, 07:04 authored by Michael SumnerThe 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 EconomicsISSN
09603107Publisher
RoutledgeIssue
5Volume
6Page range
393-399ISBN
0960-3107Department affiliated with
- Economics Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2012-02-06Usage metrics
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