ABSTRACT
An understanding of the determinants of holdings of financial assets is of crucial importance for a number of macroeconomic issues. The growth of non-bank financial intermediaries, the substitutability between money and other assets, the determination of interest rates and so on are all related to the pattern of financial asset holdings. The most popular approach to modelling holdings of financial assets is the multivariate stock adjustment model due to Brainard and Tobin (1968). This has the distinct advantage over single equation approaches that the balance sheet constraints are built in, so that the asset demands sum to total wealth. The Brainard-Tobin model does, however, suffer from the problem that there is a large number of unconstrained parameters to be estimated, with the result that many applications are characterized by statistical imprecision of a substantial proportion of the estimates. 1 The source of the problem is that interest rates are highly collinear, so that the data cannot determine such a large number of free parameters.
