Journal Article

The behavior of the M1 demand function in the early 1980s

Abstract: Models of the demand for M1 have underpredicted the level of real balances since late 1982, indicating a rightward shift in the publics M1 demand function. Most observers attribute this shift to the introduction of interest-bearing checking accounts, but, at present, it is not possible to tell whether M1 demand has been permanently or only temporarily affected. In The Behavior of the M1 Demand Function in the Early 1980s, Robert L. Hetzel points out that deposit deregulation conceivably could have affected the demand for M1 in at least two alternative ways. First, consumers could be using the new accounts for savings purposes, thus adding a new and continuing impetus to M1 demand. Alternatively, consumers could be using the new accounts solely for transactions purposes, in which case the increased demand for M1 would take the form of a one-time shift to satisfy the higher minimum balances required on the new accounts. Since interest-earning transaction accounts are too new to reveal which theory is correct, Hetzel proposes a test that will decide the case based on the rate of inflation in 1985.

Keywords: Money;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Economic Review

Publication Date: 1984

Volume: 70

Issue: Nov

Pages: 20-29