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The demand for M0 in the United Kingdom reconsidered: some specification issues

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  • Norbert Janssen
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    Abstract

    This paper provides tests of an econometric model of the demand for UK M0. The existence of a long-run cointegrating relationship between M0 and key economic variables is established and a plausible dynamic error-correction model is estimated. A model that passes standard specification tests is achieved without resort to arbitrary proxies for financial innovation. Some of the recent decline in M0 velocity is explained by the move to a lower inflation environment.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1998/wp83.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 83.

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    Date of creation: Aug 1998
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    Handle: RePEc:boe:boeewp:83

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    1. Mike Joyce, 1995. "Modelling UK Inflation Uncertainty: The Impact of News and the Relationship with Inflation," Bank of England working papers 30, Bank of England.
    2. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September.
    3. John Huizinga & Frederic S. Mishkin, 1985. "Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates," NBER Working Papers 1678, National Bureau of Economic Research, Inc.
    4. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
    5. 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.
    6. Frederic S. Mishkin, 1984. "The Real Interest Rate: A Multi-Country Empirical Study," Canadian Journal of Economics, Canadian Economics Association, vol. 17(2), pages 283-311, May.
    7. Hendry, David F. & Ericsson, Neil R., 1991. "Modeling the demand for narrow money in the United Kingdom and the United States," European Economic Review, Elsevier, vol. 35(4), pages 833-881, May.
    8. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    9. Chadha, Jagjit S & Haldane, Andrew G & Janssen, Norbert G J, 1998. "Shoe-Leather Costs Reconsidered," Economic Journal, Royal Economic Society, vol. 108(447), pages 363-82, March.
    10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    11. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 107-23, February.
    12. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
    13. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
    14. David F. Hendry & Neil R. Ericsson, 1989. "An econometric analysis of UK money demand in MONETARY TRENDS IN THE UNITED STATES AND THE UNITED KINGDOM by Milton Friedman and Anna J. Schwartz," International Finance Discussion Papers 355, Board of Governors of the Federal Reserve System (U.S.).
    15. Taylor, Mark P, 1987. "Financial Innovation, Inflation and the Stability of the Demand for Broad Money in the United Kingdom," Bulletin of Economic Research, Wiley Blackwell, vol. 39(3), pages 225-33, July.
    16. Hester, Donald D, 1982. "On the Adequacy of Policy Instruments and Information When the Meaning of Money Is Changing," American Economic Review, American Economic Association, vol. 72(2), pages 40-44, May.
    17. Breedon, F J & Fisher, P G, 1996. "M0: Causes and Consequences," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(4), pages 371-87, December.
    18. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
    19. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    20. Mark S Astley & Andrew G Haldane, 1995. "Money as an Indicator," Bank of England working papers 35, Bank of England.
    21. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
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    Cited by:
    1. Edward Nelson, 2000. "Direct effects of base money on aggregate demand: theory and evidence," Bank of England working papers 122, Bank of England.
    2. Simon Hall & Chris Salmon & Tony Yates & Nicoletta Batini, 1999. "Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom," Bank of England working papers 96, Bank of England.
    3. Srečko Devjak & Ludvik Bogataj, 2007. "Optimisation of short term commercial bank loans to corporates in terms of financing operating activities in Slovenia," Central European Journal of Operations Research, Springer, vol. 15(4), pages 393-403, November.

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