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Estabilidad de la Demanda de Dinero, Cointegración y Política Monetaria

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Author Info
Luis Oscar Herrera
Rodrigo Vergara () (Instituto de Economía. Pontificia Universidad Católica de Chile.)

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Abstract

The stability of the demand for money is of primary importance for the design of monetary policy. If it is found that a stable long term relation exists then the monetary authority should set strict monetary targets for this term if it wants to keep inflation under control. Hence, although changes in monetary aggregates could not be that important in the short run, in the long run they will be closely associated with changes in prices. This paper uses the cointegration approach to see whether it is possible to find a stable money demand function in the long run. The estimation period goes from 1978:I until 1991:I. It is found that such a relation exists if a dummy is included in the demand for money for the period starting in 1983:IV. This dummy would be capturing "technological innovations" in the financial sector for that period. Once established that the demand for money cointegrates (or, is stable in the tong run) it is possible to find a short term error correction representation for it. This short term money demand is compared in terms of its parameters and predictive power with the demand for money currently in use by the Central Bank of Chile (MR model). It is found that the latter would have performed better in terms of predictions for the period 1987:I -1991:I. In other words, if an error correction model had been used to predict the money demand for this period, predictions would have been worse.

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Publisher Info
Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.

Volume (Year): 29 (1992)
Issue (Month): 86 ()
Pages: 35-54
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Handle: RePEc:ioe:cuadec:v:29:y:1992:i:86:p:35-54

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  1. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January. [Downloadable!] (restricted)
  2. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-97, November. [Downloadable!] (restricted)
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  3. Friedman, Benjamin M, 1988. "Monetary Policy without Quantity Variables," American Economic Review, American Economic Association, vol. 78(2), pages 440-45, May. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  5. James Tobin, 1980. "Stabilization Policy Ten Years After," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1980-1), pages 19-90. [Downloadable!]
  6. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December. [Downloadable!] (restricted)
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  7. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  8. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
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  9. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January. [Downloadable!] (restricted)
  10. Bennett T. McCallum, 1991. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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