The role of capital flows in the adjustment of money demand: The case of Finland

Abstract

The paper models the dual role of money balances as a short-run buffet stock and an asset with a weU-speeified long-run demand function. The analysis is carried out in an open economy framework. Consequently, there will be an offset to monetary policy in the form of induced capital movements, but in our model, it will be distributed over time even under perfect substitutability of financial claims. Estimates for the parameters of the demand for money function axe obtained from a capital flow equation using both unrestricted (OLS) and restricted (nonlinear) estimation methods, The results provide strong evidence in favour of the shock-absorption theory for the adjustment of money demand under money supply changes.

The `Buffer Stock Notion in Monetary Economics

“…There is space here only to mention some representative studies. As far as the demand for money function per se is concerned, the issues which I have raised in this paper have been investigated for the United States by, among others, Lewis (1978), Laidler (1980), Coats (1982) and Judd and Scadding (1982b), for the United Kingdom by Artis and Lewis (1976) and for Finland by Kanniainen and Tarkka (1983 stock approach gets support from this work, particularly the more recent studies.…”

Disequilibrium Buffer Stock Models: A Survey

“…Consequently, viewing the price level as being determined in the money market does not 'work well' empirically. Similar models to which this criticism attaches include Khan (1986), Coats (1982) and Kanniainen and Tarrka (1984). Artis and Lewis (1976) and Lewis ( Note that coefficient restrictions apply.…”