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Smooth-adjustment econometrics and inventory-theoretic money management

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  • Greene, Clinton A.
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    Abstract

    A growing number of empirical papers use Miller-Orr (S, s) money management as economic motivation for application of non-linear smooth-adjustment models. This paper shows such models are not implied by the Miller-Orr economy. Instead, the Miller-Orr economy implies non-standard smooth-adjustment, as derived in the neglected (and misinterpreted) work of Milbourne et al. (1983). Remarkably, this function includes a varying weight on the lagged dependent variable, capturing static (not dynamic) effects. Interpretations of these apparent dynamics are presented, some of which may be useful in non-monetary (S, s) contexts. Results imply a new agenda for applied smooth-adjustment modeling of money.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 34 (2010)
    Issue (Month): 6 (June)
    Pages: 1031-1047

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    Handle: RePEc:eee:dyncon:v:34:y:2010:i:6:p:1031-1047

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Money Miller-Orr Smooth-adjustment Nonlinear Inventory;

    References

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    1. Lee, Chien-Chiang & Chen, Pei-Fen & Chang, Chun-Ping, 2007. "Testing linearity in a cointegrating STR model for the money demand function: International evidence from G-7 countries," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 76(4), pages 293-302.
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    11. Bertola, G. & Caballero, R.J., 1990. "Kinked Adjustment Costs And Aggregate Dynamics," Discussion Papers 1990_20, Columbia University, Department of Economics.
    12. Jyh-Lin Wu & Yu-Hau Hu, 2007. "Currency substitution and nonlinear error correction in Taiwan's demand for broad money," Applied Economics, Taylor & Francis Journals, vol. 39(13), pages 1635-1645.
    13. Bar-Ilan, Avner, 1990. "Trigger-Target Rules Need Not Be Optimal with Fixed Adjustment Costs: A Simple Comment on Optimal Money Holding under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 229-34, February.
    14. Haug & Julie Tam, 2007. "A Closer Look At Long-Run U.S. Money Demand: Linear Or Nonlinear Error-Correction With M0, M1, Or M2?," Economic Inquiry, Western Economic Association International, vol. 45(2), pages 363-376, 04.
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