The demand for money by business firms: temporal cross-sectional investigation

Abstract

The objective of this thesis is to develop and test demand for money models by business firms. Becuase, it is argued, there are significant differences in the demand for money by industrial sectors, two sectors the retailing and distribution industry and the electrical engineering industry, were selected for empirical investigation.The firms in each sector were observed over the period from 1968 to 1971. Specifically this thesis attempts to shed some light on whether demand for many models based on the wealth adjustment theories are superior to those based on the transactions theories. The wealth/transactions hypothesisis also investigated. In addition the existence of economies of scale and the degree of substitution between money and other assets is investigated. Particular attention is paid to the limitations of the statistical techniques used by previous studies and different techniques are suggested on order to test the empirical validity of the theories in question. To this end an error components model and a two-stage least squares method is applied to combined cross-sectional and time-series data. The empirical results obtained seem to indicate that monetary models based on the wealth adjustment theories provide a better description of the demand for money by the two industrial sectors than the models based on the transaction theories. Some evidence was found for the existence of both a wealth and transactions demand for money. Economies of scale were evident for the electrical engineering sector but not for the retailing and distribution sector. There was no evidence of any important substitution between money and other assets.