International Evidence on Long-Run Money Demand

Luca Benati

Robert E. Lucas, Jr.

Juan Pablo Nicolini, Senior Research Economist

Warren E. Weber, Retired Economist

February 2017 | Federal Reserve Bank of Minneapolis Working Paper 737

We explore the long-run demand for M1 based on a data set that has comprised 32 countries since 1851. In many cases, cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I and for moderate and high-inflation countries.

With the exception of high-inflation countries–for which a “log-log” specification is preferred–the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960). This is especially clear for the United States and other low-inflation countries.

Related: Working Paper 738: Online Appendix for International Evidence on Long-Run Money Demand