Financial Market Risk and U.S. Money Demand

Financial Market Risk and U.S. Money Demand

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This paper examines empirically U.S. broad money demand emphasizing the role of financial market risk. We find that money demand rises with the liquidity risk of stock markets or the credit risk of corporate bond markets. After controlling for the effect of financial market risk, money demand becomes relatively stable over the last 35 years. At the sectoral level, household money holdings continue to be stable in a traditional model controlling for a decline in transactions costs for investing in mutual funds in the early 1990s. In contrast, business money holdings have been consistently (positively) associated with credit risk.Stock market illiquidity was high during the period following the stock market crash in 1987 and the recession of 1990. The stock market becomes persistently illiquid following the 1998 LTCM/Russian crisis. The low point for liquidity occurs anbsp;...

Title:Financial Market Risk and U.S. Money Demand
Author: Woon Gyu Choi, David Cook
Publisher:International Monetary Fund - 2007-04-01

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