A Monthly Money Demand for Chile: 1983:1-1992:8

Abstract

Conventional wisdom in Chile today, adopted by critical observers and monetary authorities alike, points to the hypothesis that money demand is an unstable and erratic function, even at quarterly frequency. As a consequence of this, so the argument goes, the Central Bank should attempt to achieve price stabilization by focusing primarily on interest rates, without paying much attention to nominal monetary aggregates. This paper presents an econometric estimation of a monthly money demand function for Chile during the period 1983:1-1992:8. The estimated function satisfies strong stability tests and passes a number of other statistical criteria. The demand displays the necessary flexibility to accommodate important short run fluctuations which results in a fit to the data superior to all money demand functions estimated so far in Chile. The finding presented in this paper strongly suggests to rethink the potential role that nominal monetary objectives may have on price stabilization policies.