Australian money demand and interest-elasticity : a review of the 1980's

The demand for money is a very important area of economic theory and research since it is one of the main determinants of economic activity. The objective of this thesis is to illustrate the changed nature of the demand for money in Australia following the extensive deregulation of financial markets. There has been a large and somewhat exhaustive number of studies conducted on the role of the money supply as a key variable in the transmission mechanism. Studies relating to the demand for money have predominantly examined the stability of money demand However, due to a current strong reliance on monetary policy to correct demand induced imbalances in the Australian economy, it appears necessary to examine the interest-elasticity of money demand, an issue which has so far been sadly neglected in the Australian literature on financial sector deregulation. This thesis is an attempt to address these deficiencies in the literature by examining the demand for money in the context of an open economy. In consideration of the interest-elasticity of money demand, we find that money demand may have become more sensitive to interest rates. We also find the rate of return on foreign assets may have become a significant determinant of the demand for money in Australia.