ME> Vol.2 No.3, July 2011

A Longitudinal Analysis of the Stability of Household Money Demand

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ABSTRACT

Past aggregate time-series studies, conducted under the assumption of a representative economic agent, frequently show that the demand for narrowly defined M1, especially non-interest-yielding demand deposit, is unstable during periods of financial innovations. Whether this is longitudinally the case among life-cycle savers is unclear. This study utilizes longitudinal data to take another look and find that volatility in the demand for non-interest-earning checking accounts in the mid and late 1990s is attributable solely to the portion held for the transactions motive. When the conventional Baumol-Tobin model is extended to include human capital and family formation variables representing the life-cycle motive, equilibrium money demand is a stable function of both economic and demographic variables.

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Cite this paper

J. Tin, "A Longitudinal Analysis of the Stability of Household Money Demand," Modern Economy, Vol. 2 No. 3, 2011, pp. 416-420. doi: 10.4236/me.2011.23046.

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