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EMPIRICAL MODELLING OF MONEY DEMAND IN PERIODS OF STRUCTURAL CHANGE: THE CASE OF GREECE

Sophocles N. Brissimis

Bank of Greece, Economic Research Department and University of Piraeus

George Hondroyiannis

Bank of Greece, Economic Research Department

P.A.V.B. Swamy

US Bureau of Labour Statistics

George S. Tavlas

Bank of Greece, Economic Research Department

ABSTRACT

This paper examines the behaviour of the demand for money in Greece during 1976:1-2000:4, a period that included many of the influences that cause money-demand instability. Two empirical methodologies, vector error correction (VEC) modelling and second-generation random coefficient (RC) modelling, are used to estimate the demand for money. The coefficients of both the VEC and RC procedures support the hypothesis that the demand for money becomes more responsive to both the own rate of return on money balances and the opportunity cost of holding money because of financial deregulation. In general, both procedures also support the hypothesis that the income elasticity of money demand declines over time as a result of technological improvements in the payments system and the development of money substitutes, which lead to economies of scale in holding money.

Keywords: Money demand; VEC, random coefficient estimation

JEL classification: C20; E41

The authors wish to thank Stephen Hall and Lawrence Klein for helpful comments. The views expressed are the authors' own and should not be interpreted as those of their respective institutions.

Correspondence:

George Tavlas,

Economic Research Department,

Bank of Greece, 21 El. Venizelou St.,

102 50 Athens, Greece,

Tel. +30210-320.2370, Fax +30210-320.2432

Email: gtavlas@bankofgreece.gr


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