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Title: Money demand and money supply in an extended IS-LM framework : an econometric study
Author: Brissimis, Sophocles N.
Awarding Body: University of Edinburgh
Current Institution: University of Edinburgh
Date of Award: 1976
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This study represents the first empirical piece of work on the IS-LM model which takes into account simultaneously the main criticisms levelled against the model and estimates its equations as a unified set of hypotheses. Specifically (a) by extending the model to include a price determination equation, expressing real sector variables in real terms and financial variables in nominal terms and introducing the price level in expenditure equations as well as in the money demand function, we have been able to determine the proportions in which each time nominal income changes are divided between output changes and price changes in a model in which the IS and LM parts ceased to be two independently shifting sets of relationships; and (b) by specifying price expectations as an endogenous element in the system and examining the relationship between the returns on bonds and equities, we have been able to distinguish between the nominal interest rate, which is appropriate for the demand for and supply of money, and the real interest rate which is relevant to investment decisions. Additionally we have admitted government activity, international trade and an endogenous money supply in the model, thus increasing its usefulness for the study of policy problems. The model's equations were estimated by two stage least squares and first order autoregressive errors (where necessary) and some of its dynamic properties as expressed in the appropriate impact and interim multipliers were analysed in relation to the set of empirical propositions known in the literature as monetarism. The validity of the propositions concerning the effect of monetary policy on interest rates and on real income and the price level in the short-run has been ascertained whereas propositions which refer to the long-run and imply an independence of real from monetary variables were not found to hold true. A number of other issues dealt with in this study are the possibility of the accommodation of the short-run and the long-run within the same structure, the existence of money illusion in expenditure equations both as a short-run and a long-run phenomenon, the relaxation of the assumption that the money demand function is homogeneous of the first degree in prices and nominal income, the effect of interest rate and special deposits on money supply, the introduction of a lag distribution characterised by weights alternating in sign and declining geometrically in absolute value and the estimation of a realistic series of full-employment output for use in the price equation. Finally, we have examined the multiplier effects of exogenous on endogenous variables in linear dynamic econometric models of higher than first order in which the lags of exogenous variables are extended to more than one period. A mistake in the theory of the calculation of multipliers in such models has been pointed out and the analysis and correct formulae have been provided. Furthermore, the asymptotic distribution of impact and interim multipliers has been derived for the case of a generalised linear dynamic model.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available