This monograph provides an extensive empirical review of the demand for money in Taiwan over the past two decades. We focused on the short term, taken here to be quarterly, because this time frame appears to be the most relevant for policy purposes. We examined the following questions:
1. Has the demand function for money remained stable during this period? Is there any evidence of either systematic long-run shifts or marked short-run instabilities that render historically estimated relationship unsuitable for analytical purposes?
2. Can we use quarterly data to pin down the long-term income elasticity? Is this income elasticity greater or less than unity?
3. Which definition of money is most appropriate for short-term analysis – the conventional M1, the more broadly defined M2, or the more narrowly defined currency and demand deposits?
4. Is there any indication that expected rates of inflation influence the demand for money and if so how does this relate to the various definitions of money used as the dependent variable?
5. What is the appropriate scale variable – income, wealth, or total debits? Which interest rates best explain the demand for money?
6. How important are the problems of serial correlation and simultaneous equation bias? Which functional form works better – linear or log-linear? Should we include seasonal dummy variables?
As the outline suggests, we covered a fairly broad range of issues related to the specifications and properties of the demand-for-money function. We hope that our research will stimulate further interest in the subject.
