Economic policies and demand for money: evidence from Canada

This study identifies Canadian fiscal and monetary policy regime changes that could influence the services of money. It is argued that if these policy regime changes were not incorporated in the estimation of demand for real balances, the resulting estimate Would be biased and unstable. Using Canadian monthly data for the January 1975 to June 2001 period, the paper estimates a standard demand-for-money (M 1) function with and without these policy regime changes. It was found the demand for money in Canada is stable over the short- and long-run periods when these policy regime changes are incorporated and the estimated coefficients have correct signs.