Simultaneous Estimation of the Demand for and Supply of Money in Australia

The aim of present study is to investigate the demand and supply of money using Australian data. This paper is used a simultaneous-equation model and applying the three-stage least squares method. This paper finds that money demand is negatively associated with the interest rate and positively affected by real GDP and the nominal effective exchange rate and that money supply has a positive relationship with the interest rate and a negative relationship with the output gap and the inflation gap. These results suggest that the Federal Reserve Bank would reduce money supply if the output gap or the inflation gap increases.