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Time-Varying Money Demand and Real Balance Effects
This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that households? money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the households? preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. An empirical study of U.S. data revealed that there was a gradual fall in the interest-elasticity of money demand of approximately one-third during the 1970s due to high ...