An Empirical Investigation of Money Demand: Evidence from a Cash-In-Advance Model

This paper investigates the empirical performance of a cash-in-advance model of money demand in which the income velocity of money may be nonstationary. Generalized method of moments is used to estimate parameters from first-order conditions but, unlike much of the existing empirical work on money/asset pricing models, the Euler equations are not assumed to hold exactly. Instrumental variables methods are used to estimate the model parameters, with careful attention paid to the choice of valid instruments. The estimated parameters are used to solve the model and its predictions are compared with those of an unrestricted VAR.