Modelling Demand for Broad Money in Australia

The existence of a stable demand for money is very important for the conduct of monetary policy. It is argued that previous work on the demand for money in Australia has not been very satisfactory in a number of ways. This paper examines the long- and short-run determinants of the demand for broad money employing the Johansen cointegration technique and a short-run dynamic model. Using quarterly data for the period 1976:3-2002:2, this paper finds, inter alia, that the demand for broad money is cointegrated with real income, the rate of return on 10-year Treasury bonds, the cash rate and the rate of inflation.