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Working Papers

March 1986, No. 86-1

The Demand for Currency in the United States

Michael Dotsey

The idea of totally deregulating the financial system and implementing monetary policy through currency control has received renewed attention. An important aspect concerning the desirability of using currency as the instrument of policy is the behavior of the demand for currency. If currency demand is not well behaved, then a policy of controlling the nominal supply of currency could produce drastic swings in the price level and interest rates. The adverse consequence of such effects could outweigh the benefits of deregulation. It is therefore crucial that the behavior of currency demand be well understood before unequivocally advocating total financial deregulation and currency control. This paper takes a step in that direction by analyzing the demand for currency over the period 1921-1980.

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