Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates

We find strong evidence of a stable 'money demand' relationship for MZM and M2M through the 1990s, Though the M2 relation breaks down somewhere around 1990, evidence has been accumulating that the disturbance is well characte rized as a permanent upward shift in M2 velocity, which began around 1990 a nd was largely over by 1994. Taken together, our results support the hypoth esis that households permanently reallocated a portion of their wealth from time deposits to mutual funds. Although this reallocation may have been in duced by depository restructuring, we argue that the substitution could be explained by appropriately measured opportunity cost. (C) 2000 Elsevier Sci ence B.V. All rights reserved. JEL classification: E41.