REGRESSION DIRECTION AND WEAK EXOGENEITY - DETERMINING THE CONDITIONING PROPERTIES OF US MONEY DEMAND-FUNCTIONS

The absence of testing for weak exogeneity in money demand has often l ed to stark conditioning claims regarding the validity of price equati ons. This paper uses the Johansen procedure to explore the conditionin g properties of money demand systems for nonborrowed reserves, M1, and M2. Our results show that irrespective of the specification of the co integrating relation, a feedback mechanism enters the equation for mon ey. The opposite, however, is not true for the price equations. The re sults also cast a warning for single-equation models of money demand i n that weak exogeneity is sensitive to how the system is defined.