Money Demand in Australia: Which Monetary Aggregate Matters?
Article first published online: 21 APR 2014
© 2014 The Economic Society of Australia
Economic Papers: A journal of applied economics and policy
Volume 33, Issue 1, pages 95–103, March 2014
How to Cite
Lim, S. and Khun, C. (2014), Money Demand in Australia: Which Monetary Aggregate Matters?. Economic Papers: A journal of applied economics and policy, 33: 95–103. doi: 10.1111/1759-3441.12062
- Issue published online: 21 APR 2014
- Article first published online: 21 APR 2014
- demand for money;
- Johansen cointegration test;
- monetary aggregate
We examine the long-run relation linking the demand for money in Australia to economic activity and the interest rate for an extended period from 1976 to 2010. Using the Johansen cointegration test, we test the relationship for three measures of monetary aggregate – currency, M1 and M3. The results provide evidence for a long-run equilibrium relation linking the demand for M1 to economic activity and the interest rate. The relationship is stable with unitary income elasticity and sizeable interest rate semi-elasticity. The evidence may open a new debate for the Reserve Bank of Australia to look into the use of M1 as a tool in implementing its monetary policy after a long-time abandonment of M3.