FINANCIAL INNOVATION AND THE LONG-RUN DEMAND FOR MONEY IN THE UNITED-KINGDOM AND IN WEST-GERMANY

This paper uses a cointegration model to compare the long-run demand for broad money in the UK and (West) Germany during the period 1963Q1-1990Q2. In the long-run demand function for Germany, real M3 is determined in classical manner by real income and a single opportunity cost variable. By contrast, the UK demand function requires in addition an explicit own rate on money as well as a risk variable. The income elasticity is also very high. These differences reflect the more rapid pace of financial innovation in the UK in the 1970s and 1980s.