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Nonlinearities in the dynamics of the euro area demand for M1

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Author Info

  • Alessandro Calza

    () (European Central Bank)

  • Andrea Zaghini

    () (Bank of Italy, Economics, Research and International Relations Area)

Abstract

The paper finds evidence of non-linearities in the dynamics of the euro-area demand for the narrow aggregate M1. A long-run money demand relationship is first estimated over a sample period covering the last three decades. While the parameters of the relationship are jointly stable, there are indications of non-linearity in the residuals of the error-correction model. This non-linearity is explicitly modelled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of non-linearities in the dynamics of adjustment to equilibrium stemming from "buffer stock" and "target-threshold" models and with analogous empirical evidence for European countries and the US.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 690.

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Date of creation: Sep 2008
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Handle: RePEc:bdi:wptemi:td_690_08

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Web page: http://www.bancaditalia.it
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Keywords: Euro area; cointegration; non-linear error-correction; demand for money;

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  1. Barnett, William A., 2007. "Multilateral aggregation-theoretic monetary aggregation over heterogeneous countries," Journal of Econometrics, Elsevier, vol. 136(2), pages 457-482, February.
  2. Arthur E. Gandolfi & James R. Lothian, 1980. "International Price Behavior and the Demand for Money," NBER Working Papers 0602, National Bureau of Economic Research, Inc.
  3. Camacho, Maximo, 2005. "Markov-switching stochastic trends and economic fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 135-158, January.
  4. Bierens, Herman J., 1997. "Nonparametric cointegration analysis," Journal of Econometrics, Elsevier, vol. 77(2), pages 379-404, April.
  5. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
  6. Livio Stracca, 2003. "The Functional Form Of The Demand For Euro Area M1," Manchester School, University of Manchester, vol. 71(2), pages 172-204, 03.
  7. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
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