Measuring Income Elasticity for Swiss Money Demand: What Do the Cantons Say About Financial Innovation?

42 Pages Posted: 27 Sep 2005

See all articles by Andreas M. Fischer

Andreas M. Fischer

Swiss National Bank; Centre for Economic Policy Research (CEPR)

Date Written: May 2005

Abstract

Recent time-series evidence has reconfirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy.

Keywords: Money demand, cross-regional estimates, regional financial sophistication

JEL Classification: C21, E41, E50

Suggested Citation

Fischer, Andreas M., Measuring Income Elasticity for Swiss Money Demand: What Do the Cantons Say About Financial Innovation? (May 2005). CEPR Discussion Paper No. 5050, Available at SSRN: https://ssrn.com/abstract=774324

Andreas M. Fischer (Contact Author)

Swiss National Bank ( email )

Borsenstrasse 15
CH-8022 Zurich
Switzerland
+41 1 631 3294 (Phone)
+41 1 631 3901 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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