Financial market participation andthe apparent instability of money demand$

This paper uses multi-period cross-sectional data on financial assets holdings to shed light on the postwar stability of money demand in the United States. I first present a new measure of the evolution of financial market participation, by relating participation to the extensive margins of money demand, and quantify the influence of wealth on participation decisions. I then relate the increase in participation to the periodof ‘‘missing money’’ and to the subsequent higher interest rate elasticity of monetary aggregates. The paper indicates that time-series estimations of money demand relationships are inherently flawed and tend to inappropriately suggest instability. r 2004 Elsevier B.V. All rights reserved.