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Uncertainty, Expectations, and Financial InstabilityReviving Allais's Lost Theory of Psychological Time$
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Eric Barthalon

Print publication date: 2014

Print ISBN-13: 9780231166287

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231166287.001.0001

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Joint Testing of the HRL Formulation of the Demand for Money and of the Fundamental Equation of Monetary Dynamics

Joint Testing of the HRL Formulation of the Demand for Money and of the Fundamental Equation of Monetary Dynamics

Chapter:
(p.113) Chapter Six Joint Testing of the HRL Formulation of the Demand for Money and of the Fundamental Equation of Monetary Dynamics
Source:
Uncertainty, Expectations, and Financial Instability
Author(s):

Eric Barthalon

Publisher:
Columbia University Press
DOI:10.7312/columbia/9780231166287.003.0006

This chapter focuses on the simultaneous testing of the compatibility of both the HRL formulation of the demand for money and the fundamental equation of monetary dynamics (FEMD) with empirical data. Maurice Allais's HRL formulation of the demand for money and the FEMD complement each other and are in practice interdependent. Through the coefficient of psychological expansion, the HRL formulation links the sequence of rates of growth in nominal spending and relative desired balances, while the FEMD shows how the gap between effective and desired balances determines growth in nominal spending. Yet, appealing as these complementarity and interdependence may be from a theoretical point of view, they remain to be confronted with empirical data. This chapter first reviews early tests of the HRL formulation of the demand for money before discussing Allais's joint testing of the HRL formulation and the FEMD using the U.S. economy of 1918–1941 as the data set. It also considers the insights and assumptions that behavioral finance could or should borrow from Allais's monetary dynamics.

Keywords:   testing, HRL formulation, demand for money, fundamental equation of monetary dynamics, empirical data, Maurice Allais, nominal spending, economy, behavioral finance, monetary dynamics

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