The time-varying performance of the long-run demand for money in the United States

This article investigates the issues of the stability and predictability an d interest-sensitivity of money demand over 1870-1997 Two different estimat ion methodologies are used-random coefficient (RC) modeling and vector erro r correction (VEC) modeling. The former procedure allows the profiles of th e coefficients to be traced over time and relaxes several restrictions rout inely imposed in applied work. The results indicate that different estimati on methodologies using different data periods and frequencies yield estimat es of some of the coefficients of the long-run demand for money that fall w ithin a fairly narrow range. The results also suggest that specification er rors have had an important influence on the time profile of the interest el asticity of money demand and that there is a tendency for the interest elas ticity to decline in absolute value as interest rates decline.