The Interest Rate Volatility And The Demand For Money: The

Researchers have suggested that shortcomings of money demand models are due to the assumption that the demand for money does not respond to policy changes by the Federal Reserve System. The plausibility of a policy variant model is investigated by studying the sample period from first-quarter 1959 through 3rd-quarter 1979. The estimations are used to calculate interest rate and income elasticities of demand for real balances, and the mean income and interest rate elasticities for the entire period and for the subperiods are compared. The evidence does not support the hypothesis that an increase (a decrease) in interest rate variance leads to a more interest rate and income inelastic (elastic) demand for money. Both regression and elasticity results seem to provide little support for the policy variant model of demand for real balances.