The long and short of money: short-run dynamics within a structural model

Empirical examinations into aggregate money demand functions, generally, incorporate a monetary aggregate as the dependent variable. While this custom may be inefficient, it does not create any new difficulties for estimating the demand function's long-run parameters, as money supply would equal money demand. The short-run estimates, however, are not as fortunate. As the monetary aggregate is a measure of supply and not demand, one needs to tease out the short-run responses associated with money demand changes with those which are associated with monetary supply shocks. The present article, therefore, proposes a more complete representation of monetary sector behaviour and in doing so, finds significant support for the so-called buffer stock money demand models.