Zarembka's Estimate of Best Functional Form Applied to a Money Demand Equation

Abstract

Introduction Many recent articles on monetary economics devote considerable effort to empirically testing various current theories of money demand. Their authors search for new and better proxies to give empirical content to ‘demand‐for‐money’, ‘income’, and ‘interest‐rate’ magnitudes, standard components of money demand equations. They consider questions of which interest rate to choose from among the manifold, and whether to use Ml or perhaps some other money supply measure to represent ‘demand‐for‐money’. But these economists do not exert the same effort when giving specific form to general money demand functions. The usual research practice is to rather arbitrarily express estimating equations in either a linear or a log‐log functional form (1).