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Fractional Cointegration And Aggregate Money Demand Functions

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  • Guglielmo Maria Caporale

    ()

  • Luis A. Gil-Alana

Abstract

This paper examines aggregate money demand relationships in five industrial countries by employing a two-step strategy for testing the null hypothesis of no cointegration against alternatives which are fractionally cointegrated. Fractional cointegration would imply that, although there exists a long-run relationship, the equilibrium errors exhibit slow reversion to zero, i.e. that the error correction term possesses long memory, and hence deviations from equilibrium are highly persistent. It is found that the null hypothesis of no cointegration cannot be rejected for Japan. By contrast, there is some evidence of fractional cointegration for the remaining countries, i.e., Germany, Canada, the US, and the UK (where, however, the negative income elasticity which is found is not theory-consistent). Consequently, it appears that money targeting might be the appropriate policy framework for monetary authorities in the first three countries, but not in Japan or in the UK.

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Bibliographic Info

Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 05-01.

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Length: 25 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:bru:bruppp:05-01

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Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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Cited by:
  1. Kumar, Saten & Webber, Don J. & Fargher, Scott, 2013. "Money demand stability: A case study of Nigeria," Journal of Policy Modeling, Elsevier, vol. 35(6), pages 978-991.
  2. Saten Kumar & Mamta B. Chowdhury & B. Bhaskara Rao, 2013. "Demand for money in the selected OECD countries: a time series panel data approach and structural breaks," Applied Economics, Taylor & Francis Journals, vol. 45(14), pages 1767-1776, May.
  3. repec:ise:isegwp:wp182008 is not listed on IDEAS
  4. Kumar, Saten, 2011. "Financial reforms and money demand: Evidence from 20 developing countries," Economic Systems, Elsevier, vol. 35(3), pages 323-334, September.
  5. Wei Liao & Sampawende J.-A. Tapsoba, 2014. "China’s Monetary Policy and Interest Rate Liberalization: Lessons from International Experiences," IMF Working Papers 14/75, International Monetary Fund.
  6. Tang, Chor Foon, 2007. "The stability of money demand function in Japan: Evidence from rolling cointegration approach," MPRA Paper 19807, University Library of Munich, Germany.

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