Working paper No. 61
By Ryland Thomas
The paper is the first part of a follow-up study to Fisher and Vega (1993) examining the demand for M4 by different sectors of the UK economy. It estimates a two-equation model of personal sector money holdings and consumption, using the recently developed partial systems methodology of Boswijk (1995). A general closed system of variables is estimated which is then reduced to an open two-equation simultaneous model using weak exogeneity tests, and making particular identifying restrictions on both the short and long-run structure. Money and consumption are shown to be related in the long run to income, wealth and interest rates, the estimated relationships being fairly standard theoretical specifications. But the model reveals interesting short-run interactions between money and consumption. Disturbances to consumption yield a negative correlation between consumption and money in the short run as predicted by “buffer-stock”/“target-threshold” type models of money demand. Disturbances to money on the other hand yield a positive correlation between money and consumption in the short run.