The Demand for Liquid Assets: Evidence From the Minflex Laurent Demand System With Conditionally Heteroskedastic Errors

Abstract

We investigate the demand for money and the degree of substitutability among monetary assets in the United States using the generalized Leontief and the Minflex Laurent (ML) models as suggested by Serletis and Shahmoradi (2007). In doing so, we merge the demand systems literature with the recent financial econometrics literature, relaxing the homoskedasticity assumption and instead assuming that the covariance matrix of the errors of flexible demand systems is time-varying. We also pay explicit attention to theoretical regularity, treating the curvature property as a maintained hypothesis. Our findings indicate that only the curvature constrained ML model with a Baba, Engle, Kraft, and Kroner (BEKK) specification for the conditional covariance matrix is able to generate inference consistent with theoretical regularity.

Habit persistence in assets demand

“…Locally flexible functional forms, that are flexible at a point of approximation, have been frequently used in analyzing substitution between monetary assets. Studies that use locally flexible forms include the Taylor series translog models in Ewis and Fisher (1985) and Serletis (1987, 1988), Almost Ideal Demand System by Barr and Cuthbertson (1991) and Drake (1992), Minflex Laurent specification Barnett and Gaekwad (2018), Chang and Serletis (2019); Serlestis and Xu (2019, 2020), and flexible normalized quadratic specification used by Jadidzadeh and Serletis (2019) and Serletis and Xu (2020). An alternative is to use globally flexible functional forms such as Gallant's (1981) Fourier specification and Barnett and Jonas' (1983) Asymptotically Ideal Model to analyze monetary asset demand.…”