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International Evidence on Long-Run Money Demand

Staff Report 587 | Published June 18, 2019

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Luca Benati University of Bern
Robert E. Lucas, Jr. University of Chicago
Juan Pablo Nicolini Senior Research Economist and Universidad Torcuato Di Tella
Warren E. Weber Retired Economist
International Evidence on Long-Run Money Demand


We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.

Online appendix: [Staff Report 588]( "Online Appendix")
Data file: [LongRunMoneyDemandFinalDatabase.xls]( "Data file")

An earlier version of this Staff Report circulated as [Working Paper 737]( "Working Paper 737").
Published in _Journal of Monetary Economics_ (vol. 117, January 2021, pp. 43-63),