Empirical Modelling of Money Demand in Periods of Structural Change: The Case of Greece*

Abstract

This paper examines the behaviour of the demand for money in Greece during 1976Q1 to 2000Q4, a period that witnessed many of the influences that cause money-demand instability. Two empirical methodologies, vector error correction (VEC) modelling and second-generation random coefficient (RC) modelling, are used to estimate the demand for money. The coefficients of both the VEC and RC procedures support the hypothesis that the demand for money becomes more responsive to both the own rate of return on money balances and the opportunity cost of holding money because of financial deregulation. In general, both procedures also support the hypothesis that the income elasticity of money demand declines over time as a result of technological improvements in the payments system and the development of money substitutes, which lead to economies of scale in holding money.*We are very grateful to a referee for insightful comments on an earlier version of this paper. We also wish to thank Stephen Hall and Lawrence Klein for helpful comments. The views expressed are the authors' own and should not be interpreted as those of their respective institutions. JEL Classification numbers: C20, E41.OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 65, 5 (2003) 0305-9049 605

Money, Income and Inflation in Equilibrium – The Case of Greece

“…6 was treated as a money demand function, the coefficients of y t and π t reveal a long-run real income and inflation elasticity of money demand equal to 1.515% and −0.507% respectively. Comparing these results with the elasticities derived in the context of other empirical works, the magnitude of which is presented in Table 7, it is quite evident that the magnitude of income elasticity derived in the current analysis is quite close to the one derived by Economidou and Oskooee (2005) in case of M2, Brissimis et al (2003) and Psaradakis (1993). The cointegrating coefficient of the alternative cost of holding money is, however, far bigger than the one derived in the context of the other empirical analysis with the exception of that derived by Ericsson and Sharma (1996).…”

Changes in financial structure and asset price substitutability: A test of the bank lending channel

“…Banks would then play a special role because they offer a third distinct asset in addition to money and bonds, namely credit. The credit channel that has been more frequently analyzed in the recent literature is referred to as the bank lending channel 1 . As noted by Bernanke (1993), the basic assumption needed for bank credit to have an independent effect in monetary transmission is that loans and bond issues are not perfect substitutes for firms and that banks do not consider loans as perfect substitutes for securities due to financial market imperfections.…”

Recent developments in understanding the demand for money

“…For example, while cointegration techniques have enabled money demand research to address econometric issues regarding nonstationary relationships, advances in identifying shifting long-term relationships are needed (e.g., building off the work of Brissimis, Hondroyiannis, & Swamy, 2003;Orphanides & Porter, 1998). There is also the need to empirically incorporate improvements in electronic payments media and off-balance sheet financial services (e.g., overdraft protection and lines of credit) into multi-asset portfolio models, which may require advances in theoretically understanding and empirically measuring the amorphous concept of liquidity.…”