A Study on Money Demand - Does the Buffer Stock Behavior Exist?


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According to the Buffer stock money demand (BSMD) hypothesis, there is a buffer stock variable that will absorb the impact of an external shock to protect a target variable from being affected. The protection allows the target variable to move smoothly instead of fluctuating during a period of time. The theory of BSMD treats money as a buffer stock because the costs of adjusting money holding are much less than the costs of changing GDP or other less liquid assets. Therefore, when a shock occurs, the time path of GDP is smoothed, whereas the money growth becomes volatile. This theoretical prediction is consistent with the recent observation of volatile money market and stable GDP growth in the US. This paper develops, tests, and evaluates the cross-equation restrictions derived from the multi-period forwards-looking theory when money and its determinants are seasonally cointegrated. By using macroeconomic data in Taiwan, it is found the unit roots are present at the zero and (1/4) frequencies, implying that these series are likely to be cointegrated at zero and (1/4) frequencies. The buffer stock behavior, however, is rejected.


Business | Law | Law and Economics

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