Estimating Lagged Relationships in Corporate Demand for Liquid Assets

HE most important motivation for T current study investigating lagged relationships in corporate demand for liquid assets is current controversy over lags in monetary policy. The literature is so wellknown that it need not be recapitulated here. The evidence that has been presented is of two kinds: analysis based on turning points in different series, i.e., that by Friedman; and an analysis based on estimation of distributed lag relationships, i.e., by Karaken and Solow. The latter authors estimate distributed lag relationships in different sectors and simply add these up. However, as Tucker 12 has pointed out, in a general equilibrium context summing lags in various sectors to measure lag in monetary policy is not a valid procedure. This implies that estimation of distributed lags should be done in a simultaneous equations context. But we feel that there are still several unresolved problems connected with estimation of single equations. The present study, therefore, concentrates on estimating distributed lags in a single equation context, with a specific view of analyzing merits and demerits of various alternative estimation techniques proposed till now for estimation of distributed lag models. We recognize that controversy over lags in monetary policy must be resolved in a general equilibrium context, with additional evidence on interactions among all variables, and especially on lags in each component function. For manufacturing corporations there is little evidence on lags in liquid asset demand, since most studies do not focus explicitly on this problem. Only Heston 7 and Anderson 2 enter lagged dependent variables in their regressions to examine adjustment. However, neither study discusses various problems of statistical estimation and interpretation. Anderson finds that approximately one-third of adjustment to equilibrium occurs in one quarter for cash while figure is about onefourth for government securities.' On other hand, Heston discovers that cash adjusts less than two-thirds of way to equilibrium in one year, and government securities less than one-half.2 The number of aggregate time-series studies of money demand dealing explicitly with lags is also not large, nor are statistical procedures particularly sophisticated. In one of earliest studies using a lagged model, Bronfenbrenner and Mayer 3 find that implied speed of adjustment toward equilibrium is onefourth to one-half per year. Treating money supply as an endogenous variable and using technique of two-stage least squares, Teigen 11 observes that during postwar period, one-third of adjustment to equilibrium occurs in a quarter, while for interwar period about one-half of adjustment takes place in a year.3 A study of money demand by Chow 4 also considers question of lagged adjustment at length, both by contrasting permanent income and wealth with current income and by including lagged dependent variables.4 Chow finds that speed of adjustment is less than one-half in first year. In a Federal Reserve study, De Leeuw 5 employs alternative estimation techniques in an attempt to deal with problems of serial correlation and lagged adjustment. He concludes his analysis saying the long lag hypothesis emerges from tests against post-war data