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First Advisor

Bernd Hayo


The main purpose of this dissertation is to investigate and estimate long-run relationships for narrow and broad monetary aggregates, income and interest rate with a view to determining if there is a stable relationship that can be interpreted as a long-run money demand by drawing quarterly data for the G-7 countries over the 1978/I--1998/IV period. The unit root tests point out that the cointegration procedure put forward by Johansen (1988) and Johansen and Juselius (1990) can be utilized to evaluate the long-run aspects of the money demand functions in the G-7 countries. The exercise based on the maximum likelihood tests of cointegration offers strong evidence for long run equilibrium in the money demand function with long-term interest rate specification (in some occasions we used the spread and inflation as additional opportunity cost components). The exercise reveals significant cross-country variations in the magnitudes of real income elasticity and interest rate semi-elasticity over the specifications of the money demand function. The study offers evidence of significant structural break in the long-run money demand function. Contrary to the recommendation of some earlier research, the results of this study suggest that the demand function for the narrowly defined monetary aggregate can be used in the formulation of monetary policy in most of the selected countries.

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