Research Discussion Paper – RDP 11 A Model of the Monetary Sector Introduction

The aim of this paper is to develop a quarterly model of the Australian monetary sector. This monetary model is to form part of a quarterly model of the Australian economy [8] Quarterly seasonally unadjusted current price data for the period 1959 to 1968 are used to estimate the equations.

The variables explained by the model are the holdings by the banks (defined as All Trading Banks) of notes, coin and cash balances, loans to the money market, advances and government securities and the holdings by the non-bank private sector of currency, current deposits and fixed deposits. Work is proceeding on equations to explain the latter sector's holdings of government securities.

The plan of the paper is as follows. In section 1 the model is presented and in section 2 the structure of the model is explained. In section 3 the identities, whether explicit or implicit, are discussed and in section 4 the theory of portfolio behaviour that underlies the behavioural equations is examined. In section 5 the data used in the regressions are discussed and in sections 6 to 11 there are reports on the regression experiments for the six behavioural equations. In section 12, the preferred equations are subject to two further tests and, finally, in section 13 two implications of the model are suggested.