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February 1982

The Shift in Money Demand: What Really Happened?

by R. W. Hafer and Scott E. Hein

The money demand function is a key relationship in conventional macroeconomic models . When it appeared that during the mid-1970s the conventional specification had undergone an unforeseen shift, analysts devoted considerable ingenuity and research effort to testing alternative explanatory variables that would account for the change. Some specifications have produced marginally superior forecasting results. None, however, has been successful in explaining the post-1974 behavior of money demand.