Endogenous Money Supply and Money Demand

This paper explores the behavior of money demand by explicitly accounting for the money supply endogeneity arising from endogenous monetary policy and financial innovations. Our theoretical analysis indicates that money supply factors matter in the money demand function when the money supply partially responds to money demand. Our empirical results with U.S. data provide strong evidence for the relevance of the policy stance to the demand for MI under a regime in which monetary policy is substantially endogenous. Specifically, we find that tighter monetary policy has substantial positive impacts on money demand under the recent Federal funds rate targeting.Economic models;money supply, money demand, monetary policy, inflation, monetary economics, money stock, interest rate targeting, demand for money, money balances, price level, discount rate, money market, money balance, monetary regimes, monetary authority, real output, monetary aggregate, monetary fund, money growth, nominal interest rate, stable prices, monetary shock, moderate inflations, monetary shocks, dollar value, inflation rates, real money, inflation targeting, monetary policy instruments, federal reserve monetary policy, rational expectations, reserve requirement, monetary assets, cash management, monetary aggregates, monetary uncertainty, monetary economy, transmission of monetary policy, monetary transmission, increase in interest rates