Abstract: | Money demand functions have long been known to be frequently subject to structural change. Since their use for optimal monetary policy design is basically a forecasting exercise, it is crucial to analyse the effect of time instability on the quality of their forecasts. We discuss in this paper whether instability of demand for money functions precludes their use for policy experiments, analysing a 1963–84 sample for the UK which has been widely used in the literature. © 1998 John Wiley & Sons, Ltd. |