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U.S. MONEY DEMAND: STRUCTURAL SHIFTS OR HETEROGENEOUS AGENTS?
Author(s) -
LANDON STUART
Publication year - 1992
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1992.tb01977.x
Subject(s) - economics , econometrics , demand for money , sample (material) , demand curve , distribution (mathematics) , income elasticity of demand , microeconomics , monetary economics , mathematics , interest rate , mathematical analysis , chemistry , chromatography
This paper examines whether observed “structural shifts” in the money demand function could be the result of agent heterogeneity due to different household income levels. Following the methodology of Stoker [1986], income distribution variables are found to be significant determinants of money demand, and once changes in the distribution of income are accounted for, there is no evidence of parameter instability. A money demand function incorporating income distribution effects is shown to perform as well or better than several standard alternatives on the basis of diagnostic tests, non‐nested hypothesis tests, within‐sample prediction errors and out‐of‐sample forecasting.