Working paper No. 21
By P G Fisher and J L Vega
This paper presents an econometric analysis of M4 balances based on a split between the personal and corporate sectors. For the personal sector we find that simultaneous estimation of the demand for money and a consumption function yields encouraging results. The dynamic interaction of money and consumption may have an important role to play in explaining the recent behaviour of both variables. Modelling the corporate sector's money holdings is more problematic. The endogeneity of interest rates cannot be ignored and corporate behaviour is more likely to resemble the portfolio allocation than a traditional demand for money approach. Nevertheless, a relatively simple model can be estimated for corporate sector M4, which offers a starting point for future research.
An Empirical Analysis of M4 in the United Kingdom