Theory and Econometric Evaluation of a Systems Approach to Money Demand, The Canadian Case

This paper derives a complete system of commodity-expenditure and money demand equations. This approach seeks to: 1) unify the treatment of joint intertemporal decisions regarding the allocation of income and savings to expenditures on commodities; 2) accommodate a treatment of durable goods; 3) find a viable alternative to simple but popular single equation specification for money demand based on stock adjustment. In empirical tests, the single equation money demand rejects each of the functions in the two systems. This supports the systems approach, particularly since it has a theoretical basis lacking in the single equation.