Policy Uncertainty and the Demand for Money in Canada: A Nonlinear Approach

Abstract

Economic uncertainty is said to affect the demand for money in either direction. We use the new comprehensive measure of policy uncertainty and assess its impact on the demand for money in Canada. When a linear model was used, we found only short-run effects of uncertainty on Canadian cash holdings. However, when a nonlinear model was used, the results revealed that increased policy uncertainty has negative effect on the demand for money in the long run but decreased uncertainty has no effect, a clear sign of an asymmetric response by the public.