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Nonlinearities In The Dynamics Of The Euro Area Demand For M1

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Author Info
Calza, Alessandro
Zaghini, Andrea

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Abstract

This paper finds evidence of nonlinearities in the dynamics of the euro area demand for the narrow aggregate M1. A long-run money demand relationship is first estimated over a sample period covering the past three decades. Although the parameters of the relationship are jointly stable, there are indications of nonlinearity in the residuals of the error-correction model. This nonlinearity is explicitly modeled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of nonlinearities in the dynamics of adjustment to equilibrium stemming from and models and with analogous empirical evidence for European countries and the United States.

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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 13 (2009)
Issue (Month): 01 (February)
Pages: 1-19
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Handle: RePEc:cup:macdyn:v:13:y:2009:i:01:p:1-19_07

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Ordonez, Javier, 2003. "Stability and non-linear dynamics in the broad demand for money in Spain," Economics Letters, Elsevier, vol. 78(1), pages 139-146, January. [Downloadable!] (restricted)
  3. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De. [Downloadable!] (restricted)
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  6. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272. [Downloadable!] (restricted)
  7. Sarno, Lucio, 1999. "Adjustment Costs and Nonlinear Dynamics in the Demand for Money: Italy, 1861-1991," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(2), pages 155-77, April. [Downloadable!] (restricted)
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  12. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
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  17. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  18. Livio Stracca, 2001. "The functional form of the demand for euro area M1," Working Paper Series 051, European Central Bank. [Downloadable!]
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  19. Cuthbertson, Keith & Taylor, Mark P, 1987. "The Demand for Money: A Dynamic Rational Expectations Model," Economic Journal, Royal Economic Society, vol. 97(388a), pages 65-76, Supplemen.
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  23. Ehrmann, Michael & Ellison, Martin & Valla, Natacha, 2003. "Regime-dependent impulse response functions in a Markov-switching vector autoregression model," Economics Letters, Elsevier, vol. 78(3), pages 295-299, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ines Buono, 2009. "Firm heterogeneity and comparative advantage: the response of French firms to Turkey's entry in the European Customs Union," Temi di discussione (Economic working papers) 715, Bank of Italy, Economic Research Department. [Downloadable!]
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