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Example 20.1: Analyzing Demand for Liquid Assets

In this example, the demand equations for liquid assets are estimated. The demand function for the demand deposits is estimated under three error structures while demand equations for time deposits and savings and loan (S & L) association shares are calculated using the Parks method. The data for seven states (CA, DC, FL, IL, NY, TX, and WA) are selected out of 49 states. Refer to Feige (1964) for data description. All variables were transformed via natural logarithm. The first five observations of the data set A are shown in Output 20.1.1.

   data a;
      input state $ year d t s y rd rt rs;
      label d = 'Per Capita Demand Deposits'
            t = 'Per Capita Time Deposits'
            s = 'Per Capita S & L Association Shares'
            y = 'Permanent Per Capita Personal Income'
            rd = 'Service Charge on Demand Deposits'
            rt = 'Interest on Time Deposits'
            rs = 'Interest on S & L Association Shares';
   datalines;
      ... data lines are omitted ...
   ;

   proc print data=a(obs=5);
   run;

   proc sort data=a;
      by state year;
   run;
   
   title 'Demand for Liquid Assets';
   proc tscsreg data=a;
      model d = y rd rt rs / fuller parks dasilva m=7;
      model t = y rd rt rs / parks;
      model s = y rd rt rs / parks;
      id state year;
   run;

The income elasticities for liquid assets are greater than 1 except for the demand deposit income elasticity (0.692757) estimated by the Da Silva method. In Output 20.1.2, Output 20.1.3 and Output 20.1.4, the coefficient estimates (-0.29094, -0.43591, and -0.27736) of demand deposits (RD) imply that demand deposits increase significantly as the service charge is reduced. The price elasticities (0.227152 and 0.408066) for time deposits (RT) and S & L association shares (RS) have the expected sign and thus an increase in the interest rate on time deposits or S & L shares will increase the demand for the corresponding liquid asset. Demand deposits and S & L shares appear to be substitutes ( Output 20.1.2, Output 20.1.3, Output 20.1.4, and Output 20.1.6). Time deposits are also substitutes for S & L shares in the time deposit demand equation ( Output 20.1.5), while these liquid assets are independent of each other in Output 20.1.6 (insignificant coefficient estimate of RT, -0.02705). Demand deposits and time deposits appear to be weak complements in Output 20.1.3 and Output 20.1.4, while the cross elasticities between demand deposits and time deposits are not significant in Output 20.1.2 and Output 20.1.5.

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