Understanding money demand of Argentina: 1935-2000

Abstract

This paper investigates whether or not a simple -Cagan like- econometric model of demand for currency can be developed for Argentina based on more than sixty years of data (1935-2000). For such a long period the presence of structural breaks cannot be ignored given the variety of economic regimes this country has experienced. The purpose is to understand from an "ex-post" perspective how money holdings have reacted to the two main determinants of their demand: a transaction variable and an opportunity cost after suitable approximations for both concepts could be obtained. Transaction elasticity estimates matter for the distribution effects of inflation tax and for measuring the size of the shadow economy. Besides, a comparative analysis of the effect of inflation, interest rates and exchange rates could clarify about the relevant opportunity cost of holding money. Once two values of the transaction elasticity were taken for the long run relationship (1 and 0.5) and inflation and interest rates alternatively measured the opportunity cost of holding money, a stable money demand -a satisfactory approximation to the data generating process- was obtained for the Argentina case.