STEPHEN M. MILLER Disequilibrium Macroeconomics, Money as a buffer stock and the Estimation of Money demand ard explanations of the seeming instability of the money demand in the post period usually link to stories about financial innovation and deregulation. I se an alternative hypothesis: Much of the seeming instability occurs because of shifts in monetary policy, either explicit or implicit, in an environment where the Federal Reserve controls a ey stock, My econometric analysis modifies existing methods for estimating markets in disequilibrium and in corporates newly developed cointegration and error-correction modeling. My find ings provide support for the buffer-stock interpretation of the money market 1. Introduction Students of macroeconomic theory are familiar with the recent extensive debate concerning macroeconomic modeling. A part of the debate considers disequilibrium or non-markct clearing macroeco- nomic models(Clower 1965; Patinkin 1965; Leijonhufvud 1968; and Barro and Grossman 1971, 1976), which failed to capture a signif- icant following, at least in the United States. This failure to attract much attention probably stems from the absence of convincing ar- guments for price rigidities One aspect of the disequilibrium macroeconomic literature fo- cuses on money as a buffer stock or shock absorber. Laidler(1984) surveys the theoretical bases for, and empirical analyses of, money as a buffer stock and concludes that "the theoretical basis of the The comments of F.w. Asking, D E w. Laidler, and two anonymous referees are gratefully acknowledged. This research was completed while the author was a Principal Analyst(visiting) at the Congressional Budget Office. The views expressed e mine and do not necessarily reflect those of the Congressional Budget Office ecause of their non-theory of (1079) recant thcir initial cnthu eir usefulness. Howitt(1979) Journal of Macroeconomics, Fall 1990, Vol. 12. No, 4, pp. 563-586 Copyright e 1990 by Louisiana State University Press 01640704/90/$1.50STEPHEN M. MILLER Uniuersity of Connecticut Storrs, Connecticut Disequilibrium Macroeconomics, Money as a Buffer Stock and the Estimation of Money Demand* Standard explanations of the seeming instability of the money demand in the post- 1973 period usually link to stories about financial innovation and deregulation. I propose an alternative hypothesis: Much of the seeming instability occurs because of shifts in monetary policy, either explicit or implicit, in an environment where the Federal Reserve controls a more “exogenous” money stock. My econometric analysis modifies existing methods for estimating markets in disequilibrium and in￾corporates newly developed cointegration and error-correction modeling. My find￾ings provide support for the buffer-stock interpretation of the money market. 1. Introduction Students of macroeconomic theory are familiar with the recent extensive debate concerning macroeconomic modeling. A part of the debate considers disequilibrium or non-market clearing macroeco￾nomic models (Clower 1965; Patinkin 1965; Leijonhufvud 1968; and Barro and Grossman 1971, 1976), which failed to capture a signif￾icant following, at least in the United States. This failure to attract much attention probably stems from the absence of convincing ar￾guments for price rigidities. r One aspect of the disequilibrium macroeconomic literature fo￾cuses on money as a buffer stock or shock absorber. Laidler (1984) surveys the theoretical bases for, and empirical analyses of, money as a buffer stock and concludes that “the theoretical basis of the *The comments of F.W. Ahking, D.E.W. Laidler, and two anonymous referees are gratefully acknowledged. This research was completed while the author was a Principal Analyst (visiting) at the Congressional Budget Office. The views expressed are mine and do not necessarily reflect those of the Congressional Budget Offrce or its statf. ‘Barr0 (1979) criticizes disequilibrium models because of their “non-theory of price rigidities.” And Barro (1979) and Grossman (1979) recant their initial enthu￾siasm for disequilibrium models, questioning their usefulness. Howitt (1979), in contrast, provides a more sympathetic evaluation. Journal of Macroeconomics, Fall 1990, Vol. 12, No. 4, pp. 563586 563 Copyright 0 1996 by Louisiana State University Press 0164-0704/96/$1.56