Demand for Money in the United States: Stability and Forward-Looking Tests

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

This is an interesting study of money demand, using cointegration and ECMs in the spirit of Hendry. The results suggest the money demand is stable for the US, and fiscal policy does have a significant effect. I have the following comments:

- In the introduction at the end you need to provide a brief outline of the rest of the paper.

- On page three it mentions an equation (4), but I couldn't find the equation (4).

- There should be more theoretical discussion on why the various fiscal variables included in the model would affect money demand, for instance how they may affect precautionary demand for money.

- It would be informative to have some plots of the data used.

- Some of the dummy variables don't coincide with any notable events, the authors need to explain in more detail why they were added.

-An instrumental variable Newey West approach is used, but I think this approach needs more explanation, does this involve two-stage-least squares for instance?

- In the cointegration tests, the Johansen usually involves a VAR, with the resulting VECM, rather than a parsimonious ECM, the authors need to explain why they opted for the ECM rather than VECM.

The error correction terms are non-linear, I think they need more justification and explanation, do any previous studies use this type of ect and how do you interpret the coefficients as they are mostly above 1, so above 100% adjustment to equilibrium.

- The results should be compared more to those obtained in other similar published studies.

Minor points

- The significant variables should be starred in the tables.

Comments on the Quality of English Language

The English is mostly good, but it could do with a final proof reading.

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

The research is very well grounded in macroeconomic theories (monetarist, neo-classical, neo-Keynesian, real business cycles theory, and others). The authors justify the importance of a stable demand for money for the economy and policymakers.

The authors' empirical research for the U.S. finds, among others, that, besides other fiscal variables, foreign-financed public (government)  debt per GDP significantly affects the demand for money. It can be a significant result for other countries, considering the sovereign debt crisis in some EU member states in the aftermath of the financial crisis of 2007–2008. Overall, in subsequent studies, it is worth testing the model used in the current paper for other countries to compare the results.

The manuscript is methodologically sound and clearly written. The study design is logical. The research uses sophisticated statistical (mathematical) methods that seem correct. However, the current reviewer is not an appropriately qualified statistical expert competent for statistical evaluation.

The results section of the paper presents what the Authors found when they conducted their analyses and explains their results. Still, the paper lacks a complete discussion, namely a connection of obtained results with prior research (of other authors, in other countries, etc.) 

Additional scientific articles that can be included in the literature review and list of references:

1.     William A. Barnett, Taniya Ghosh, Masudul Hasan Adil. 2022. Is money demand really unstable? Evidence from Divisia monetary aggregates, Economic Analysis and Policy, 74, 606-622, https://doi.org/10.1016/j.eap.2022.03.019. (an examination of the nature of the demand for money in the Euro Area, India, Israel, Poland, the UK, and the US)

2.     Nel, H., Blaauw, D., & Pretorius, A. (2020). Investigating the Hungarian Money Demand Function: Possible Implications for Monetary Policy. International Journal of Economics and Finance Studies, 12(1), 71-87. https://doi.org/10.34109/ijefs.202012105

Technical (editorial) shortcomings

Is the reference style adjusted to the Journal requirements?

(Albulescu et al. 2019) Albulescu, Claudiu Tiberiu, Dominique Pépin, and Stephen M. Miller. 2019. The Micro-Foundations of an Open Economy Money Demand: An Application to Central and Eastern European Countries. Journal of Macroeconomics 60: 631 33-45. doi.org/10.1016/j.jmacro.2019.01.002

109: „Let us modify Equation (4) of Kia” – Shouldn't there be number (1)?

144-145: Missing numbering of Equation (4).

371-372 The title of Table 2 is not clear

The paper uses different Personal pronouns related to its Author(s). „In this paper, we find” (line 90) vs. „I estimated Equation”(line 548)

Comments on the Quality of English Language

The English language is correct, few editorial corrections are necessary

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Reviewer 3 Report

Comments and Suggestions for Authors

The topic of the paper is topical and relevant, and I congratulate the authors on their work.

The central theme of the work is the demand for money in the United States, with a focus on the stability of this demand and the factors that influence it. The paper also analyzes how agents in the money market behave in response to changes in exchange rates, consumption and interest rates, and the implications of the stability (or instability) of the demand for money for monetary policy in the United States.

In this sense, the title is appropriate to the content of the work. It clearly reflects the focus of the paper.

The title of the paper clearly reflects the focus of the work: the implications of the stability (or instability) of the demand for money in the United States for monetary policy in the United States, highlighting the stability of this demand and carrying out tests related to the forward-looking perspective of agents in the money market. In this way, the title seems appropriate for communicating the main themes and objectives addressed in the work.

The methodology used in the work is based on econometric models that estimate the demand for money in the United States, considering variables such as interest rates, exchange rates, personal consumption, fiscal deficit, public debt and debt financed by foreigners. The paper also carries out stability tests, such as the Augmented Dickey Fuller and non-parametric Phillips-Perron tests, on the stationary properties of the variables. Lee and Strazicich (2003) adjusted tests and Perron tests, Zivot and Andrews tests, on the demand for money and investigates whether agents in the money market are "forward-looking", that is, whether their expectations are formed rationally and whether they adapt their behavior based on changes in economic variables. 

It would also be relevant to clarify the overexogeneity of the variables, i.e. whether the variables are truly exogenous in the model. As well as the application of robustness tests, such as heteroscedasticity, autocorrelation and specification tests, which are fundamental to guaranteeing the soundness of the results and conclusions of the work.

The conclusions of the work are clear and supported by the research. As far as the bibliography is concerned, the authors reference important studies and authors in the field of demand for money and monetary policies, but they could present more current references, i.e. from the last 5 years, which would make the work more up-to-date. In the work, approximately 15% of the references are from the last 5 years, and I believe that this percentage should be higher, i.e. close to 30%.

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

Comments and Suggestions for Authors

The revisions have been done well.

Comments on the Quality of English Language

The English is fine.