Abstract
The idea of modelling money as a buffer stock has recently attracted new interest, as papers such as Laidler (1984) and Goodhart (1984) testify, and a number of recent empirical studies are based on the concept. The approach, in some variation, is to embed a term measuring the difference between money held and money desired in one or more equations explaining real or financial adjustments in the economy, and possibly to estimate the parameters of the long-run money demand relation by this indirect route. An early instance was Johnson’s monetary approach to the balance of payments (see Frenkel and Johnson, 1976). Other examples, in addition to the present author’s work (Davidson and Keil, 1982; Davidson, 1984) include Howitt and Laidler (1979), Laidler and O’Shea (1980), Coghlan (1981), Jonson and Trevor (1981), Laidler and Bentley (1983), and Knoester and van Sinderen (1985).
This paper was prepared for presentation to the Money Study Group, 28 June 1985. I must thank David Vines, Charles Goodhart, Charlie Bean, Martin Weale and Peter Jonson for their comments on earlier versions of the model, though no responsibility attaches to them for the present one. I am also very grateful to Orazio Attanasio for research assistance, and to the Economic and Social Research Council Macroeconomic Modelling and Forecasting Consortium for support of this research.
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Davidson, J. (1987). Disequilibrium Money: Some Further Results with a Monetary Model of the UK. In: Goodhart, C., Currie, D., Llewellyn, D.T. (eds) The Operation and Regulation of Financial Markets. Studies in Monetary Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-09287-1_6
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