Abstract:
Traditional studies of money demand for both developed and less developed countries have shown
that there are periods of "missing money," that is, there is consistent overprediction of real balances.
This paper uses cointegration techniques to study the effects of financial innovation on the demand for
real balances in Bolivia, Israel, and Venezuela. The results show that financial innovation can account
for the instability of money demand observed in these countries. In particular, I find that the long run
demand for real balances shifted down. In addition, I show that the speed at which people adjust their
demand for money when out of equilibrium increases following financial innovation.
|
