U.S. Money Demand: Surprising Cross-Sectional Estimates

Casey B. Mulligan and Xavier X. Sala-i-Martin

Brookings Papers on Economic Activity, 2:1992, 285-343


We estimate money demand functions using cross-sections of U.S. states over the period 1929-1990. We arrive at a number of interesting conclusions. First, our estimates of the income elasticity lie between 1.3 and 1.5, significantly above one. We are unable to attribute this result to geographical differences in financial sophistication or banking laws. Second, money demand is a stable function over an impressive sample period, 1929-1990. Third, income per capita is a better scale variable than consumption. Finally, we find that during some time periods, agricultural regions have demanded more money than would be predicted given their income.