RDP 8701: The Australian Demand Function for Money: Another Look at Stability Preface

This paper is part of a larger stream of research on monetary issues being conducted at the Reserve Bank. In that stream, it fits between two other papers. Earlier work by John Veale, Lindsay Boulton and Warren Tease re-estimated some standard demand for money equations, and looked at their performance, with particular interest in 1985. This was in order to focus on what was a particularly difficult policy problem at the time, namely the appropriateness of M3, and of monetary aggregates more generally, as monetary Indicators. Stability of the equations was not tested in a formal sense.

A forthcoming paper by Adrian Blundell-Wignall and Susan Thorp will address the question of stability for broad money in a formal manner, in the context of a more general treatment of own-interest rate effects on money demand. It is some time since a study formally addressed the stability of existing demand functions for the narrower aggregates in Australia. This paper is aimed at filling that gap.

Glenn Stevens
February 1987