Working Paper

Endogenous financial innovation and the demand for money

Abstract: This paper embeds two key ideas about the nature of financial innovation taken from the empirical literature into a familiar equilibrium monetary model. It provides formal support for several alternative econometric specifications for money demand that attempt to capture the effects of financial innovation and demonstrates that a popular theoretical model of money demand, when suitably modified, can account for some unusual monetary dynamics found in the data. Thus, it helps to establish both the theoretical relevance of recent empirical work and the empirical relevance of recent theoretical work on the demand of money.

Keywords: Money theory; Financial services industry;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 1992

Number: 92-03