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Financial Services, Cointegration, and the Demand for Money in Israel

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  • Melnick, Rafi
Abstract
The main hypothesis of this study is that ignoring the state of the financial services in the demand for money is a theoretical misspecification and is an important reason for the instability of the money demand as traditionally estimated. A measurement approach for the state of the financial services is developed and applied to estimation of the demand for money in Israel. The approach presented in Melnick (1990) is further developed by analyzing the lack of cointegration between real balances and their determinants according to theory as a case of omitted variables in a nonstationary time-series set-up. When our measure for the state of the financial services is included, it yields a stable, cointegrated, long-run demand far money relationship. The validity of steady-state inflation-tax analysis is questioned and a negative recommendation for the use of quantitative money targets is given. Copyright 1995 by Ohio State University Press.

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  • Melnick, Rafi, 1995. "Financial Services, Cointegration, and the Demand for Money in Israel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 140-153, February.
    • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:140-53
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    Cited by:

    1. Browne, F.X. & Fagan, G. & Henry, J., 1997. "Money Demand in EU Countries : A Survey," Papers 7, European Monetary Institute.
    2. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
    3. Rana Ejaz Ali Khan & Qazi Muhammad Adnan Hye, 2013. "Financial liberalization and demand for money: a case of Pakistan," Journal of Developing Areas, Tennessee State University, College of Business, vol. 47(2), pages 175-198, July-Dece.
    4. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction Services, Inflation, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1274-1301, December.
    5. Verónica Mies M. & Raimundo Soto M., 2000. "Money Demand: Theory, Evidence, Results," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 3(3), pages 5-32, December.
    6. Beenstock, Michael & Azoulay, Eddy & Offenbacher, Akiva & Sulla, Olga, 2003. "A macroeconometric model with oligopolistic banks: monetary control, inflation and growth in Israel," Economic Modelling, Elsevier, vol. 20(3), pages 455-486, May.
    7. Gillman M. & Siklos & P.L.Silver & J.L., 1996. "Money Velocity with Costly Credit," Department of Economics - Working Papers Series 515, The University of Melbourne.
    8. Masudul Hasan Adil & Neeraj Hatekar & Pravakar Sahoo, 2020. "The Impact of Financial Innovation on the Money Demand Function: An Empirical Verification in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(1), pages 28-61, February.
    9. Kevin S. Nell, 1999. "The Stability of Money Demand in South Africa, 1965-1997," Studies in Economics 9905, School of Economics, University of Kent.
    10. Nitzan Tzur-Ilan, 2018. "LTV Limits and Borrower Risk," Bank of Israel Working Papers 2018.12, Bank of Israel.
    11. Michael Bruno & Rafi Melnick, 1995. "High Inflation Dynamics: Integrating Short­-Run Accommodation and Long­-Run Steady-­States," Bank of Israel Working Papers 1995.06, Bank of Israel.

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