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FLEXIBLE FUNCTIONAL FORMS, CURVATURE CONDITIONS, AND THE DEMAND FOR ASSETS

Published online by Cambridge University Press:  07 May 2007

APOSTOLOS SERLETIS  and
ASGHAR SHAHMORADI
APOSTOLOS SERLETIS
Affiliation:
University of Calgary
ASGHAR SHAHMORADI
Affiliation:
University of Tehran
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Abstract

This paper focuses on the demand for money in the United States in the context of five popular locally flexible functional forms—the generalized Leontief, the basic translog, the almost ideal demand system, the Minflex Laurent, and the normalized quadratic reciprocal indirect utility function. We pay explicit attention to the theoretical regularity conditions of positivity, monotonicity, and curvature and argue that much of the older empirical literature ignores economic regularity. We treat the curvature property as a maintained hypothesis and provide a comparison in terms of violations of the regularity conditions and in terms of output in the form of a full set of elasticities. We also provide a policy perspective, in that a strong case can be made for abandoning the simple sum approach to monetary aggregation, on the basis of the low elasticities of substitution among the components of the popular M2 aggregate of money.

Keywords

Generalized LeontiefTranslogAlmost Ideal Demand SystemMinflex LaurentNormalized Quadratic Reciprocal Indirect Utility Function
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 4 , September 2007 , pp. 455 - 486
Copyright
© 2007 Cambridge University Press

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