On the determination of the money stock : Some estimates

Abstract

This paper presents a framework for the determination of the money stock and interest rate under the monetary base, nonborrowed reserves and interest rate targeting and uses a generalized adjustment mechanism to produce specifications to be estimated. Estimation results from U.S. quarterly data over the period 1951.2-1983.4 indicate instability of all specifications over the whole sample period thus suggesting that a single regime - e.g. interest rate targeting - may not be appropriate for the whole period. Moreover, while the evidence in terms of interest rate versus nonborrowed reserves targeting is not clearcut, our findings tend to support the claim that the standard demand for money function suffers from simultaneity bias. There is finally a modest amount of evidence for the view that the monetary base targeting assumption is not capable of explaining the data. Causality tests are not incompatible with these findings.