| Summary: | This paper evaluates an empirical model of U.K. money demand developed by Milton Friedman and Anna J. Schwartz in Monetary Trends in the United States and the United Kingdom. Testing reveals misspecification and, hence, the potential for an improved model. Using recursive procedures on their annual data, the authors obtain a better-fitting, constant, dynamic error-correction (cointegration) model. Results on exogeneity and encompassing imply that the authors' money-demand model is interpretable as a model of money, but not of prices, since its constancy holds only conditionally on contemporaneous prices.
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