Financial Market Risk and U.S. Money Demand

Author/Editor:

David Cook ; Woon Gyu Choi

Publication Date:

April 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines empirically U.S. broad money demand emphasizing the role of financial market risk. We find that money demand rises with the liquidity risk of stock markets or the credit risk of corporate bond markets. After controlling for the effect of financial market risk, money demand becomes relatively stable over the last 35 years. At the sectoral level, household money holdings continue to be stable in a traditional model controlling for a decline in transactions costs for investing in mutual funds in the early 1990s. In contrast, business money holdings have been consistently (positively) associated with credit risk.

Series:

Working Paper No. 2007/089

Subject:

Demand for money Financial markets Financial regulation and supervision Liquidity risk Market risk Monetary base Money Stock markets

English

Publication Date:

April 1, 2007

ISBN/ISSN:

9781451866537/1018-5941

Stock No:

WPIEA2007089

Pages:

33

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