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Modelling of Structural Changes in Demand for Money Cointegration Relations

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  • Hannu Koskinen

    ()
    (School of Business and Economics, University of Jyväskylä, Finland)

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    Abstract

    In this paper the multivariate cointegration technique coupled with a smooth nonlinear trend of time is applied to model the demand for money. Unmodelled gradual structural changes in the cointegration parameters affect the specification of the cointegration relations so that the number of cointegrating vectors found by linear methodology is smaller than suggested by the economic theory. Here the demand for broad money in Finland during 1980–1996 is analysed. It turns out that, if the cointegrated VAR model is extended with a suitable nonlinear deterministic trend of time related to the intercept term, then the missing cointegration relation between broad money and the scale variable is found and the cointegration space can then be identified.

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    Bibliographic Info

    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 17 (2004)
    Issue (Month): 2 (Autumn)
    Pages: 63-72

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    Handle: RePEc:fep:journl:v:17:y:2004:i:2:p:63-72

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    1. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-11, July.
    2. Bent Nielsen & Soren Johansen and Rocco Mosconi, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Economics Series Working Papers 2000-W22, University of Oxford, Department of Economics.
    3. Potter, Simon M, 1999. " Nonlinear Time Series Modelling: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 505-28, December.
    4. Katarina Juselius, 1997. "Changing Monetary Transmission Mechanisms within the EU," Discussion Papers 97-18, University of Copenhagen. Department of Economics.
    5. Saikkonen, Pentti, 2001. "Consistent Estimation In Cointegrated Vector Autoregressive Models With Nonlinear Time Trends In Cointegrating Relations," Econometric Theory, Cambridge University Press, vol. 17(02), pages 296-326, April.
    6. Markku Lanne, 2004. "Nonlinear dynamics of interest rate and inflation," Macroeconomics 0405014, EconWPA.
    7. Carlo C. A. Winder & Martin M. G. Fase, 1998. "Wealth and the demand for money in the European union," Empirical Economics, Springer, vol. 23(3), pages 507-524.
    8. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
    9. repec:cup:macdyn:v:5:y:2001:i:4:p:577-97 is not listed on IDEAS
    10. Changli He & Timo Terasvirta & Andres Gonzalez, 2009. "Testing Parameter Constancy in Stationary Vector Autoregressive Models Against Continuous Change," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 225-245.
    11. repec:fth:bfsefi:e13 is not listed on IDEAS
    12. Ripatti, Antti & null, Pentti, 2001. "Vector Autoregressive Processes With Nonlinear Time Trends In Cointegrating Relations," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 577-597, September.
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