The Substitutability and Separability of Monetary

Abstract

<p>In this thesis, I have three objectives: (1) to estimate the substitutability/ complementarity relationship between monetary assets; (2) to systematically test the empirical significance of the separability (aggregation) assumptions implicit in broad definitions of money, and (3) to compare the use of simple-sum and Divisia monetary quantity indices as data in an empirical demand system.</p> <p>The theoretical part of the thesis consists of deriving a system of monetary asset demand equations from an individual model of utility maximizing behaviour. This model takes advantage of a number of important advances in the theory of models of utility maximization in this context, such as: the duality between direct and indirect utility functions; and the theory of two-stage optimization.</p> <p>For our empirical work, we use a demand system which is derived from a flexible functional form interpretation of the indirect translog utility function. The use of such an approximate demand system enables us to impose theoretical restrictions through explicit side constraints on the parameters, thus permitting statistical tests of their validity. Moreover, as Denny and Fuss (1977) have shown, the approximate trans log model permits a less restrictive test of separability than the Berndt-Christensen exact translog framework.</p> <p>The model was applied to quarterly Canadian data for the period 1968I-1982IV, and was estimated using Barten's (1969) F.I.M.L. method for estimating singular systems.</p> <p>The results obtained from the study lead to a number of important conclusions and are also of value as indicators of potential future research.</p>