Financial Innovation, Inflation and the Stabihty of the Demand for Broad Money in the United Kingdom

ABSTRACT This note presents an estimate of a demand function for broad money (£M3) for the UK, 1964ii–1985iv. It shows no sign of structural instability due to Competition and Credit Control, and forecasts well for twenty quarters post‐sample (1981i‐1985iv). A key innovation is the allowance made for financial innovation by including the interest rate available on new, high‐interest chequing accounts in the equation.