Short-runmoneydemand$

The conventionalwisdomholdsthattheshort-rundemandformoneyisunstable.This paperchallengestheconventionalviewbyfindingastabledemandforM1inU.S.data from 1959through1993.Theapproachfollowspreviousworkininterpretinglong-run moneydemandasacointegratingrelation,anditusesGoldfeld’spartial-adjustment modeltointerpretshort-rundynamics.Thekeyinnovationisthechoiceoftheinterest rateinthemoneydemandfunction.Mostpreviousworkusesashort-termmarketrate, but thispaperusestheaveragereturnon‘‘nearmonies’’—the savingsaccountsand moneymarketmutualfundsthatareclosesubstitutesforM1.Thischoicehelps rationalizethebehaviorofmoneydemand;inparticular,theincreaseinthevolatilityof velocityafter1980isexplainedbyincreasedvolatilityinthereturnsonnearmonies