UNITED-STATES BUSINESS CREDIT SOURCES, DEMAND DEPOSITS, AND THE MISSING MONEY

This study accounts for much of the 'missing money' in the US. Through compensating balances, business lending by banks affects demand deposit growth. Standard money demand models include variables that likely pick up income and interest rate effects on the transactions demand for demand deposits and on compensating balance requirements - provided that bank lending to firms is stable. However, during the 'missing money' period, businesses shifted toward nonbank sources of short-term credit, causing a decline in compensating balances. Empirical findings support this hypothesis as a partial explanation for the 'missing money' using the Federal Reserve Board's demand deposit model.