Modeling US households' demands for liquid wealth in an era of financial change

Money demand models overpredicted M2 growth in the United States from 1990 to 1993. We examine this overprediction using a model of households' demands for liquid wealth. The model is a dynamic generalization of the AIDS model of Deaton and Muellbauer (1980a). we find that the own-price elasticity of money rose substantially after 1990. We also End important cross-price elasticities of money with respect to other liquid financial assets, notably with respect to mutual funds. Incorporating these and other features helps explain nearly 50 percent of the shortfall in M2 growth over the period in question.