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Modelling of Structural Changes in Demand for Money Cointegration Relations

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Author Info
Hannu Koskinen () (School of Business and Economics, University of Jyväskylä, Finland)
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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Publisher 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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Web page: http://www.taloustieteellinenyhdistys.fi
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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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  1. Lanne , Markku, 2002. "Nonlinear dynamics of interest rate and inflation," Research Discussion Papers 21/2002, Bank of Finland. [Downloadable!]
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  2. 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. [Downloadable!]
  3. Potter, Simon M, 1999. " Nonlinear Time Series Modelling: An Introduction," Journal of Economic Surveys, Blackwell Publishing, vol. 13(5), pages 505-28, December. [Downloadable!] (restricted)
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  4. He, Changli & Teräsvirta, Timo & González, Andres, 2002. "Testing parameter constancy in stationary vector autoregressive models against continuous change," Working Paper Series in Economics and Finance 507, Stockholm School of Economics, revised 06 May 2004.
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  5. repec:cup:macdyn:v:5:y:2001:i:4:p:577-97 is not listed on IDEAS
  6. 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.
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  7. Henrik Hansen & Søren Johansen, 1992. "Recursive Estimation in Cointegrated VAR-Models," Discussion Papers 92-13, University of Copenhagen. Department of Economics.
  8. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249. [Downloadable!]
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  9. Ripatti, A., 1998. "Demand for Money in Inflation-Targeting Monetary Policy," Bank of Finland - Studies in Economics and Finance e13, Bank of Finland. Research Department..
  10. 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. [Downloadable!] (restricted)
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  11. Katarina Juselius, 1998. "Changing monetary transmission mechanisms within the EU," Empirical Economics, Springer, vol. 23(3), pages 455-481. [Downloadable!] (restricted)
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