Money Demand and the Term Structure of Interest Rates: Some Consistent Estimates

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Stuart D. Allen, Professor (Creator)
The University of North Carolina at Greensboro (UNCG )
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Abstract: Heller and Khan (1979, hereafter HK) employ a quadratic function of the term structure of interest rates to obtain quarterly coefficient estimates of its level, slope and curvature. These estimates are substituted for the interest rate variable in a short-run money demand function, HK conclude that their specification is stable during the turbulent 1972-1974 period. This note shows that HK's stability findings are dependent upon their use of the Cochrane—Orcutt iterative technique (hereafter CORC), not the inclusion of term structure variables. We show that money demand equations incorporating term structure information, specifically the specifications of HK, Bilson and Hale (1980, hereafter BH) and our own (which uses a cubic function of the term structure) are not stable when the Hatanaka (1974, hereafter HAT) procedure is employed to correct for serial correlation.

Additional Information

Journal of Monetary Economics, 11(1) January, 129-132.
Language: English
Date: 1983
Money, Demand for money, Interest rates, Economics

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