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Adapting to instability in money demand: forecasting money growth with a time-varying parameter model

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  • Timothy Cogley

Abstract

Conventional money demand models appear to be unstable, and this complicates the problem of conducting monetary policy. One way to deal with parameter instability is to learn how to adapt quickly when parameters shift. This paper applies a time-varying-parameter estimator to conventional money demand models and evaluates its usefulness as a forecasting tool. In relative terms, the time-varying-parameter estimator improves significantly on ordinary least squares. In absolute terms, we continue to have difficulty tracking money demand through turbulent periods.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1993)
Issue (Month): ()
Pages: 35-41

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Handle: RePEc:fip:fedfer:y:1993:p:35-41:n:3

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Keywords: Monetary policy - United States ; Money theory ; Demand for money;

References

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  1. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
  2. Peter N. Ireland, 1992. "Endogenous financial innovation and the demand for money," Working Paper 92-03, Federal Reserve Bank of Richmond.
  3. John V. Duca, 1993. "Should bond funds be included in M2?," Research Paper 9321, Federal Reserve Bank of Dallas.
  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  5. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-44, December.
  6. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
  7. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219.
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Cited by:
  1. Vilasuso, Jon, 1999. "The Liquidity Effect and the Operating Procedure of the Federal Reserve," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 443-461, July.

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