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Cointegration and Structural Change: An Application to the U.S. Demand for Money

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  • Wankeun Oh
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    Abstract

    I perform the cointegration tests for the trivariate model of real monetary aggregates, real personal income, and short-term interest rate. I find the existence of a long-run relationship among these three variables. To check the stability of a long-run money demand relationship, I implement a rank constancy test and CUSUM test. The test results show that real M1 is relatively more stable than other aggregates, but structural change occurred during the 1970s and early 1980s. This is consistent with prior research on money demand. Copyright 2002, Oxford University Press.

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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Economic Inquiry.

    Volume (Year): 40 (2002)
    Issue (Month): 1 (January)
    Pages: 91-101

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    Handle: RePEc:oup:ecinqu:v:40:y:2002:i:1:p:91-101

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    1. Poole, William, 1988. "Monetary Policy Lessons of Recent Inflation and Disinflation," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 73-100, Summer.
    2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    3. Hafer, R W & Jansen, Dennis W, 1991. "The Demand for Money in the United States: Evidence from Cointegration Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 155-68, May.
    4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    5. Kang Hao & Inder, Brett, 1996. "Diagnostic test for structural change in cointegrated regression models," Economics Letters, Elsevier, vol. 50(2), pages 179-187, February.
    6. Yashiv, Eran, 1994. "Money Demand in a High Inflation Economy: The Case of Israel," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 186-91, February.
    7. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July.
    8. Leventakis, John A & Brissimis, Sophocles N, 1991. " Instability of the U.S. Money Demand Function," Journal of Economic Surveys, Wiley Blackwell, vol. 5(2), pages 131-61.
    9. Hoffman, Dennis L. & Rasche, Robert H. & Tieslau, Margie A., 1995. "The stability of long-run money demand in five industrial countries," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 317-339, April.
    10. Fischer, Andreas M. & Nicoletti, Giuseppe, 1993. "Regression direction and weak exogeneity: Determining the conditioning properties of US money demand functions," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 213-235, November.
    11. Ploberger, Werner & Kramer, Walter, 1996. "A trend-resistant test for structural change based on OLS residuals," Journal of Econometrics, Elsevier, vol. 70(1), pages 175-185, January.
    12. Jain, Parul & Moon, Choon-Geol, 1994. "Sectoral Money Demand: A Co-integration Approach," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 196-202, February.
    13. Geweke, John F & Meese, Richard, 1981. "Estimating Regression Models of Finite but Unknown Order," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(1), pages 55-70, February.
    14. Barnett, William A & Offenbacher, Edward K & Spindt, Paul A, 1984. "The New Divisia Monetary Aggregates," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1049-85, December.
    15. Dennis Hoffman & Robert H. Rasche, 1989. "Long-run Income and Interest Elasticities of Money Demand in the United States," NBER Working Papers 2949, National Bureau of Economic Research, Inc.
    16. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
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