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Modelling Short-run Money Demand for the US

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  • Marcus Scheiblecker

Abstract

There is a vast amount of empirical evidence concerning the cointegrating relationship between money demand, some kind of interest rate and income. In contrast to this, short-run dynamics are still opaque. In the existing literature, the return to steady state is modeled quite differently. The range goes from simple error correction models to non-linear approaches. We herewith propose a method for considering not only disequilibria between money demand and its steady state for the last period only, but also for such of the recent past in a parsimonious and economically meaningful way. As different from multicointegration, weights for cumulating steady-state deviations are geometrically decreasing, the more they are located in the past. This model possesses an ARMA (1,1) representation and leads to an ARMAX-model, if combined with a conventional error correction model. This approach is shown to track money demand short-run dynamics better and more parsimoniously than partial-adjustment models.

Suggested Citation

  • Marcus Scheiblecker, 2017. "Modelling Short-run Money Demand for the US," Applied Economics and Finance, Redfame publishing, vol. 4(5), pages 9-20, September.
    • Handle: RePEc:rfa:aefjnl:v:4:y:2017:i:5:p:9-20
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    References listed on IDEAS

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    More about this item

    Keywords

    short-run money demand; cumulative error-correction model;

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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