Especially for monetarists-but for nonmonetarists as well- the demand function for money is of crucial importance for understanding macroeconomic activity and for making policy prescriptions. However, recent relationships between the money supply and aggregrate spending have generated increasing skepticism regarding the stability of money demand and the merits of using monetary aggregates as the bases for monetary policy. The author has formulated a demand for money function similar to so-called "conventional" models in most respects. But its specification differs from these other models in two important ways- the choice of interest rates and the determination of real income elasticity. Using his specification, the author finds that money demand continues to be highly stable and argues that the case for basing policy and setting targets in terms of Ml is as strong as ever. He concludes that the close correspondence between actual and predicted velocity implies that the recent high growth rate of Ml is not inflationary but merely has accommodated a comparable increase in money demand. Copyright 1987 Western Economic Association International.
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