Exogenous Money, Monetary (Dis)equilibrium and Expectational Lags
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Exogenous Money, Monetary (Dis)equilibrium and Expectational Lags
Credit and Capital Markets – Kredit und Kapital, Vol. 20 (1987), Iss. 2 : pp. 179–199
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Ulrich Kohli, Geneva
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Abstract
Exogenous Money, Monetary (Dis)equilibrium, and Expectational Lags
This paper addresses the question of the estimation of demand-for-money functions during periods of monetary control. As David Laidler has recently pointed out, the standard approach that postulates a partial adjustment mechanism (the Chow equation) is untenable if money is exogenous. In recent years, Switzerland has adhered very closely to amonetary base target, thus leaving little doubts that money is exogenous in the Swiss case. We report estimates of Swiss demand for base money functions using alternatively the Chow formulation, various disequilibrium hypotheses (including the one favoured by Laidler), and the permanent income hypothesis. A new estimation procedure is used in some cases to allow for the exogeneity of money during part of the sample. Our results indicate that the monetary disequilibrium hypothesis is not supported by the facts. Swiss data are consistent with monetary equilibrium, and the presence of a lagged dependent variable in money demand equations can be explained by expectational lags