DEPOSIT RATE DEREGULATION AND DEMAND FOR MONEY IN THE 1980S

An inventory-theoretic approach suggests that deposit rate deregulatio n will increase the interest-elasticity of the demand for money if dep osit rates adjust to changes in market rates with a lag. This hypothes is is tested using a short-run nominal adjustment specification for M1 , MIA and M2. Sector data is also used to provide independent tests ba sed on the impact of deregulation on each sector. Empirical results ca nnot reject the hypothesis that deposit rate deregulation has increase d the interest-elasticity of M1, MIA and M2 while business sector dema nd deposits have been unaffected. Deregulation has loosened the relati onship between the monetary aggregates and income, making it more diff icult to evaluate the impact of a target on macroeconomic goals.