Research Discussion Paper – RDP 03 Demand Equations for Money Introduction

There is no published work on the demand for money in Australia but there are many studies of the demand for money for other countries. Most of these studies develop an aggregate demand equation for money but a few specify demand equations for the components of money. The aggregate studies include those for the United States by Chow (1), Friedman (7), Hamburger (9), Heller (10), Laidler (12) and Meltzer (14) and for the United Kingdom by Fisher (6) and Walters and Kavanagh (21). Disaggregated demand equations for money appear in the studies for the United States by de Leeuw (4) and Goldfeld (8) and for the United Kingdom by Crouch (3) and Norton (16).

The definition of money is not the same in all these studies due partly to different views about the distinguishing characteristics of money and partly to the different definitions of money in the official statistics of the several countries. In Australia statistics, the volume of money is defined as the sum of currency, current deposits, fixed deposits and savings deposits. Estimating separate demand equations for these components rather than one equation for their sum yields evidence about the desirability of aggregating these components.

This study reports estimates of equations to explain quarterly movements in the public's demand for currency, current deposits, fixed deposits, and savings deposits. The estimates are based on quarterly seasonally unadjusted current price data for Australia over the period 1959(1) to 1967(4).

The theory underlying the equations is presented in Section 2. Definitions of the variables and sources of the data are given in Section 3. The estimates of the four demand equations are presented in Sections 4 to 7. In order to test the equations outside the sample period, ex post forecasts for 1968 are examined in Section 8. The best equations are reestimated with deflated data in Section 9. The results of the study are summarised in Section 10.