A stable money demand: Looking for the right monetary aggregate
The stability of a money demand relationship has
been a major concern in monetary economics for the
last 50 years. It is conventional to call the relationship
between real money, a nominal interest rate, and a
measure of economic activity a money demand relationship.
A stable relationship between these variables
helps answer important questions such as the following:
What is the average growth rate of money that
is consistent with price stability, given the average
growth of the economy and a stable nominal interest
rate? Knowledge about the response of money demand
to changes in the nominal interest rate may also help
quantify the welfare gains from a low average inflation
rate.