Specification and stability of money demand: an international comparison.

Summary The demand for money and the stability of this demand, particularly in the short term, occupy a central place in monetary theory and in the conduct of economic policy. The partial questioning of the stability of the short-term money demand function in recent years and in some countries has given rise to a major research effort. The main purpose of our study is to measure empirically the behaviour of the short-term money demand function over the last twenty years in the main industrialized countries: the United States, France, Japan, the Federal Republic of Germany and the United Kingdom. Our analysis is based on a review of the literature concerning the theories of money demand, in particular its specification and stability, and on the implementation of tests such as Chow's test as well as new economic techniques: switching regimes test, cusum and cusum of squares tests, and arch model. The results of the tests show that money demand functions behave relatively homogeneously, although there are institutional nuances between countries. With the exception of the United States, for which the tests conclude that there is some instability, it is not possible to reject the hypothesis that the money demand function is stable in the short term over both short and long periods. Since the short-term stability of the money demand function makes it possible to predict the effect of a variation in the money supply on the economy, it seems desirable to have a monetary policy that sets the money supply as an intermediate target to ensure the stability of the economy.