Work detail

The Interest Elasticity of Money Demand: A Meta-Analysis

Author: Mgr. Eliška Slouková
Year: 2022 - winter
Leaders: prof. PhDr. Tomáš Havránek Ph.D.
Work type: Finance, Financial Markets and Banking
Language: English
Pages: 156
Awards and prizes:
Abstract: Even though precise evaluation of money demand function is essential for central banking and for the right determination of the transmission mechanism,
economists have not reached a consensus about the underlying determinants
of money demand function neither their magnitude and direction. Researchers
differ even in the selection of measures used for the main variables - income, and
interest rate. While the heterogeneity in elasticity estimates of the former one
has been scrutinize in several quantitative surveys, to the best of our knowledge,
there has not been compiled any meta-analysis focusing on differences among
the interest rate elasticities of the money demand. Therefore, we collected 53
studies reporting 1 094 estimates of interest rate elasticity. Implementing both
the state-of-the-art methods and those proposed only recently, we have found
out that researches are prone to selective reporting. Firstly, our results shows
that negative publication bias is present in empirical studies of the money demand and increases the average elasticity estimate approximately three times
(in absolute terms). Secondly, negative highly precise estimates are more likely
to be compared to their imprecise counterparts. Additionally, we scrutinize potential sources of heterogeneity among individual estimates. Our results suggest
than demand for narrow money is more sensitive to rates variation compared to
demand for broad money. Furthermore, the number of rates used as a measure
of opportunity cost matters more than the type of the chosen rate. In addition,
the money demand is less sensitive to interest rate changes if the rates are low.
Finally, not controlling for inflation might bias elasticity estimates especially for
developing countries
August 2022




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