Anticipated and Unanticipated Variables in the Demand for M1 in the U.K.

This paper presents and estimates a model of the demand for money that explicitly embodies forward-looking behavior. Agents' money balances react differently to anticipated and unanticipated changes in income, prices, and interest rates. A multiperiod, rational expectations, quadratic costs of adjustment problem is solved using the discrete time calculus of variations to yield the authors' money demand equation. This estimating equation nests both partial adjustment and error correction alternatives. Empirical results obtained using U.K. data on M1 are encouraging. Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester