The demand for real cash balances deduced from an underlying portfolio model of the financial market is shown to depend upon domestic variables and foreign monetary developments. The model is estimated using quarterly postwar data for Canada, Germany, UK and US. There is clear evidence that demand for money is affected not only by changes in domestic variables such as permanent income, domestic interest rate and price expectations but also by fluctuations in exchange rate expectations and foreign interest rates. The conclusion, that domestic monetary policy is fairly ineffective and domestic financial markets are highly vulnerable to changes in foreign financial and monetary developments need to be modified in light of the results presented in this paper.
ASJC Scopus subject areas
- Economics and Econometrics