A Microeconomic System-Wide Approach to the Estimation of the Demand for Money
Salam K. Fayyad describes how the microeconomic system-wide approach to money demand differs from the usual money demand specifications. Using a neoclassical utility function defined over five expenditure categories, two of which are presumed to capture the flow of “monetary services,” he demonstrates how the microeconomic system-wide approach can be implemented. Fayyad then examines in-sample predictions of budget shares for expenditures on monetary services and the other expenditure categories estimated by this approach over the I/1969-I/1985 period. His results indicate that the microeconomic system-wide approach to money demand estimation yields predictions that closely track the actual behavior of the flow of monetary services over this period.