Working Paper 718

On the Stability of Money Demand

Robert E. Lucas, Jr.
Juan Pablo Nicolini | Senior Research Economist

Revised September 1, 2015

Abstract
We show that regulatory changes that occurred in the banking sector in the early eighties, which considerably weakened Regulation Q, can explain the apparent instability of money demand during the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for the entire period 1915-2012.



Published In: Journal of Monetary Economics (Vol. 73, July 2015, pp. 48-65)

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