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Working Paper
Financial innovations, money demand, and disaggregation: some time series evidence
This paper explores the instability in estimated money demand functions. Using a new data series on credit card usage, we evaluate the role of financial innovations in stabilizing the M1 demand function over three troubling episodes. We find that our measure of financial innovations improves the short-term predictive ability of the M1 demand function, but does not generate stable long-run elasticities. Structural instability remains even after accounting for seasonal adjustment, the turbulence in the second and third quarters of 1980, and an alternative transactions measure. ; Financial ...