Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/323607 
Year of Publication: 
2020
Citation: 
[Journal:] Economic Modelling [ISSN:] 1873-6122 [Volume:] 87 [Publisher:] Elsevier [Place:] Amsterdam [Year:] 2020 [Pages:] 197-211
Publisher: 
Elsevier, Amsterdam
Abstract: 
This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that household's money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the household's preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. An empirical study of U.S. data revealed that there was a gradual fall in the interest elasticity of money demand of approximately one-third during the 1970s due to high trend inflation. A further decline in the interest-elasticity of the demand for money was observed in the 1980s due to the changing household preferences that emerged in response to financial innovation. These developments led to a reduction in the welfare cost of inflation that subsequently explains the rise in monetary neutrality observed in the data.
Subjects: 
Money demand
Real balance effect
Welfare cost of inflation
Monetary neutrality
Financial innovation
Welfare
JEL: 
E31
E41
E52
D69
E51
E40
Published Version’s DOI: 
Document Type: 
Article
Document Version: 
Accepted Manuscript (Postprint)
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