A SUBSTITUTION TEST OF LONG-RUN MONEY DEMAND

Using a cash-credit cash-in-advance model, we derive a key long-run su bstitution condition between interest rates and ratios of alternative means of payment (such as inside and outside monies) which we test as an alternative to the standard money demand function specification of Meltzer (1963). The theoretical model thus eliminates one source of no nstationarity resulting in a more powerful test of the stability of mo ney demand. Using the recent cointegration techniques of Park (1992) a nd Johansen (1988), we find strong support for the long-run stability of this alternative money demand specification. Unlike prior research, the findings imply support for long-run money demand stability for na rrow monetary aggregates.