Econometrica: Oct, 1964, Volume 32, Issue 4

Demand and Supply Functions for Money in the United States: Some Structural Estimates

https://doi.org/0012-9682(196410)32:4<476:DASFFM>2.0.CO;2-6
p. 476-509

Ronald L. Teigen

It is common to treat the money stock as exogenously determined in empirical investigations of the demand-for-money function. However, such neglect of the role of the commercial banking system in determining the money supply introduces simultaneous equations bias. In this paper, an aggregate money-supply function is derived in which an attempt is made to segregate the exogenous and endogenous aspects of the money stock. The coefficients of a structural model of the monetary sector which includes this supply relationship, an interest-responsive transactions demand function, and a reduced form income equation are estimated jointly for both the postwar and interwar periods. Structural supply and demand elasticities are computed, and it is shown that comparable single-equation elasticities are biased downward.