International Journal of Business and Economics Volume 8, No. 3 December, 2009

Financial Innovations and the Interest Elasticity of Money Demand in the United Kingdom, 1963–2009

Mohammad S. Hasan

Kent Business School, University of Kent, U.K.

Abstract

This paper empirically examines the relationship between financial innovations and interest elasticity of money demand in the UK. Contrary to most research work in this area, the results indicate that financial innovations and other deregulatory changes in financial market conditions after the 1980s have raised the interest elasticity of money demand, and this appears to support the Gurley-Shaw hypothesis. The evidence calls into question the relative efficacy of a monetary targeting approach in the conduct of monetary policy.

Keywords：interest elasticity, money demand, financial innovations, Gurley-Shaw hypothesis, rolling regressions.

JEL Classifications：C52, E41.

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