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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 06-1999:
A COMPONENT-BASED ANALYSIS OF THE DANISH LONG-RUN MONEY DEMAND RELATION

Lisbeth Funding la Cour

Abstract: This paper examines the relation between monetary asset components and some of the

variables that traditionally enter into aggregate money demand relations. This is done for

Danish data within the natural framework of a multivariate econometric model. The

purpose of the study is to investigate issues in relation to the level and weighting of a

monetary aggregate. We show that within this model it is possible to identify monetary

aggregates at different levels of aggregation and that for the narrow aggregate (M1) equal

weighting of the components are permitted. For the broader aggregates, (M2) or (M2-M1),

equal weighting is no longer appropriate. These findings are not contradictory to what we

would expect from aggregation and index number theory. Finally, the overall identifica-tion

of the stationary (or long-run) structure points towards a co-existence of a liquid and

a less liquid money demand relation which is interpreted as an indication of the

possibility of splitting the total money demand relation with respect to different motives

for holding money.

Keywords: Monetary asset components; Aggregate money demand; Denmark; Demand relation; (follow links to similar papers)

JEL-Codes: E41; (follow links to similar papers)

24 pages, July 18, 1999

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