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Demand and Supply Functions for Money in the United States: Some Structural Estimates

Ronald L. Teigen

Abstract

It is common to treat the money stock as exogenously determined in empirical investigations of the demand-for-money function. However, such neglect of the role of the commercial banking system in determining the money supply introduces simultaneous equations bias. In this paper, an aggregate money-supply function is derived in which an attempt is made to segregate the exogenous and endogenous aspects of the money stock. The coefficients of a structural model of the monetary sector which includes this supply relationship, an interest-responsive transactions demand function, and a reduced form income equation are estimated jointly for both the postwar and interwar periods. Structural supply and demand elasticities are computed, and it is shown that comparable single-equation elasticities are biased downward.