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Nonlinear Trends and Co-trending in Canadian Money Demand

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  • Cushman David O.

    (Department of Economics, University of Saskatchewan)

Abstract

Several authors have suggested that, instead of being unit root processes, some macro variables may actually be stationary around nonlinear deterministic trends (Perron, 1989, 1990, Bierens, 1997). This paper investigates this for four variables in a standard money demand specification, using Canadian data. Evidence is first presented that the null of unit root with drift (constant, linear, or nonlinear) can be rejected in favor of nonlinear trend stationarity for the variables. Then, Bierens' (2000) nonlinear co-trending test finds two common nonlinear trends among the variables. The trends are consistent with a standard money demand relationship. All unit root and co-trending test conclusions are based on size and power results from Monte Carlo simulations as well as on asymptotic critical values. The paper concludes with a discussion of how the observed nonlinear trending and co-trending might arise in a theoretical model, and with implications for further empirical tests.

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File URL: http://www.degruyter.com/view/j/snde.2002.6.1/snde.2002.6.1.1003/snde.2002.6.1.1003.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 6 (2002)
Issue (Month): 1 (April)
Pages: 1-29

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Handle: RePEc:bpj:sndecm:v:6:y:2002:i:1:n:4

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Cited by:
  1. Ricciuti, Roberto, 2007. "The quest for a fiscal rule: Italy, 1861-1998," POLIS Working Papers 86, Institute of Public Policy and Public Choice - POLIS.
  2. David O. Cushman, 2008. "Real exchange rates may have nonlinear trends," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 158-173.
  3. Roberto Ricciuti, 2004. "Nonlinearity in testing for fiscal sustainability," Money Macro and Finance (MMF) Research Group Conference 2003 80, Money Macro and Finance Research Group.
  4. Cushman, David O. & Michael, Nils, 2011. "Nonlinear trends in real exchange rates: A panel unit root test approach," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1619-1637.

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