Financial Innovations and the Interest Elasticity of Money Demand in the United Kingdom, 1963–2009

Abstract

This paper empirically examines the relationship between financial innovations and interest elasticity of money demand in the UK. Contrary to most research work in this area, the results indicate that financial innovations and other deregulatory changes in financial market conditions after the 1980s have raised the interest elasticity of money demand, and_x000D_ this appears to support the Gurley-Shaw hypothesis. The evidence calls into question the_x000D_ relative efficacy of a monetary targeting approach in the conduct of monetary policy.