PORTFOLIO SUBSTITUTION AND RECENT M1 BEHAVIOR

A wide variety of explanations has been offered for the rapid M1 growth since early 1985. One such explanation focuses on a possible increase in the interest elasticity of money demand. We use a nonstructural framework and begin by simply asking how an increase in the degree of substitutability among monetary aggregates would affect the sample correlations among aggregates and interest rates. We then compare our answers with some summary statistics to argue that the 1980s have, in fact, witnessed a change in the behavior of money consistent with increased substitutability. Copyright 1987 Western Economic Association International.