Modeling money demand in large industrial countries: Buffer stock and error correction approaches

The empirical performance of two recent approaches to modeling money demand is compared by estimating functions for narrow and broad aggregates in five large industrial countries. Error correction modeling outperforms the Carr-Darby buffer stock model (which in turn outperforms the conventional partial adjustment model) within the 1974–1985 sample period. Post-sample, however, the comparisons are mixed. The specification of money demand appears to vary substantially from case to case.