On the stability of money demand

We show that regulatory changes that occurred in the banking sector in the early 1980s, that considerably weakened Regulation Q can explain the apparent instability of money demand starting in the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for all the period 1915-2012. (C) 2015 Elsevier B.V. All rights reserved.