| The aim of this work is to devise some patterns linking a country's inflation history and the main features of its money demand, mainly the interest rate elasticity and the adjustment dynamics. The first chapter conducts a brief review of the literature on the money demand modeling and estimation. First it focuses on the main aspects of money demand specification, discussing the different approaches behind the control variables. The second part reviews the literature on money demand dynamics, discussing the main theories behind slow money demand adjustment (i.e., adjustment costs and buffer stock) and the different methodologies used to capture and explain such dynamics. Then, we discuss how the work in the following chapters fits in the vast literature on the subject. In Chapter II short-run and long-run money demands are estimated for different aggregates (M1, quasi-money, and M2), using a sample of 24 countries. Cross-section analysis conducted on the coefficients found shows that the elasticity of money demand with respect to the real interest rate on deposits, the real yield on bonds, and expected inflation, as well as the speed of adjustment of real balances, vary across countries with different inflation levels. In Chapter III we deal with a problem that could lead to a biased estimation of the speed of adjustment: the measurement error of the dependent variable (money). By conducting a series of estimations incorporating corrections to a potential bias, we found that the conclusions reached in the Chapter II remain valid for our country sample. Finally, Chapter IV analyses whether the process of gradual adjustment from actual to desired real balances has some effect in the inflation rate. A natural way to get rid of this "disequilibrium" in the money market would be extra spending, which will induce some pressure on aggregate expenditure and thus on the inflation rate. We found that, for the great majority of the countries, the unwanted money balances do have an influence on the inflation rate. Furthermore, this effect is stronger for the countries with an inflationary past. |
