In this paper, the authors report a demand function for M4 which is identified as the key broad aggregate in the current U.K. financial environment. They estimate dynamic equations over the period 1968-92, which impose long-run elasticities obtained from the Johansen maximum likelihood procedure in terms of the now familiar two-stage approach to modeling cointegrated time series. The results indicate that properly specified demand functions yield significant interest rate effects in both the long-run solutions and the short-run dynamics. Furthermore, notwithstanding the institutional changes in the financial sector over the data period, the estimated equation yields stable parameter estimates. Copyright 1996 by Blackwell Publishers Ltd and The Victoria University of Manchester
