Research Discussion Paper – RDP 8701 The Australian Demand Function for Money: Another Look at Stability


Opinion on the stability or otherwise of the demand for money in Australia can be characterised as divided. In this paper, several conventional single-equation models representing the demand for money are re-estimated with extended and revised data sets, and subjected to a range of stability tests. Some attention is paid to the possibility of heteroskedasticity in the residuals, which is important in the context of stability tests. Apart from testing for stability in a general sense, particular emphasis is given to the first half of the 1980's, where wide-ranging financing deregulation might be expected to affect relationships between the money stock, income and interest rates.

The conclusion is that it is difficult to accept the proposition that the conventional equations have not been subject to instability. This is particularly so for M3; the evidence is more mixed in the case of M1.

View the Paper