Financial Innovations and the Distributional Effects of Interest Rate Changes in the UK

Two alternative functional forms of the demand for money that focus on how an economy as a whole adjusts its cash balances have been discussed in the literature. One functional form is obtained by regarding the money supply as exogenous and the price level as endogenous and the other by regarding the money supply as endogenous and the price level as exogenous. In this paper the author has offered a third view, a general view which regards both variables as endogenous such that the two alternative views are special cases. Subjecting these hypotheses to empirical testing, the author finds that the Canadian data for the period of 1973-86 reject the two special hypotheses in favor of his general specification.