Working paper No. 62
By Ryland Thomas
This paper models the broad money holdings of both industrial and commercial companies (ICCs) and other financial institutions (OFIs) in the United Kingdom. It uses the encompassing VAR approach of Hendry and Mizon (1993) to derive structural models from a congruent statistical representation of the data. Weak exogeneity tests, and placing identifying restrictions on both the short and long-run structure play an important part in this procedure. ICCs’ deposits are modelled jointly with investment and the cost of capital and the resulting model suggests the existence of a corporate sector liquidity channel whereby firms’ “excess” money balances have a negative influence on the cost of capital and a positive impact on investment spending. OFIs’ money holdings are modelled according to standard portfolio theory, jointly with the banks’ deposit rate setting decision (liability management).