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Economic Review

Jul/Aug, 1986

Recent Financial Deregulation and the Interest Elasticity of M1 Demand

Yash P. Mehra

Some analysts contend that the introduction nationwide since 1981 of interest-bearing NOWs and Super NOWs has raised the interest elasticity of M1 demand.  This article presents empirical evidence consistent with this view. The demand deposit component of M1 does not exhibit any heightened interest-sensitivity, suggesting it is the OCD component that has lately been more interest-sensitive. Furthermore, it is also shown that the interest elasticity of M1 demand neither changed not was it very high during the 1970s, a period of substantial financial innovations. This implies that it is the interest rate deregulation, as opposed to financial innovations, that has affected the character of M1 demand.

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