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Seasonal cointegration and the stability of the demand for money

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Author Info
Raimundo Soto
Matías Tapia

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Abstract

Studies on money demand in both developed and developing countries coincide in reporting systematic over predictions of monetary aggregates, non-robust estimated parameters and out-of-sample forecast variances that are too large to guide monetary policy. Several explanations have been given for these failures, including dynamic misspecification, omitted variables such as financial innovations, and non observed components. This paper explores an alternative, simpler way to approach the instability of money demand using seasonal-cointegration techniques. Using Chilean data we find that seasonal cointegrating vectors exist and, when omitted from the estimation, account for a substantial fraction of the observed instability in money demand functions. Because seasonal cointegrating vectors act as additional long-run restrictions, they can substantially reduce the variance of forecast errors. The estimated demand for money in Chile is remarkably stable in spite of the profound structural and financial reforms carried out throughout the 1977-2000 period, parameters are robust and similar to those suggested by economic theories.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 103.

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Date of creation: Jul 2001
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Handle: RePEc:chb:bcchwp:103

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  2. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October. [Downloadable!] (restricted)
  3. Fair, Ray C, 1987. "International Evidence on the Demand for Money," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 473-80, August. [Downloadable!] (restricted)
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  4. Bohl, Martin T., 2000. "Nonstationary stochastic seasonality and the German M2 money demand function," European Economic Review, Elsevier, vol. 44(1), pages 61-70, January. [Downloadable!] (restricted)
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  6. Engle, R.F. & Granger, C.W.J. & Hylleberg, S. & Lee, H.S., 1990. "Seasonal Cointegration: The Japanese Consumption Function," Economics Working Papers 1990-10, School of Economics and Management, University of Aarhus.
  7. Olekalns, Nilss, 1994. "Testing for unit roots in seasonally adjusted data," Economics Letters, Elsevier, vol. 45(3), pages 273-279. [Downloadable!] (restricted)
  8. Rómulo Chumacero, 2001. "Testing for unit roots using economics," Working Papers Central Bank of Chile 102, Central Bank of Chile. [Downloadable!]
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  9. Osborn, Denise R., 1993. "Seasonal cointegration," Journal of Econometrics, Elsevier, vol. 55(1-2), pages 299-303. [Downloadable!] (restricted)
  10. Canova, Fabio & Hansen, Bruce E, 1995. "Are Seasonal Patterns Constant over Time? A Test for Seasonal Stability," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 237-52, July.
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  12. Abeysinghe, Tilak, 1994. "Deterministic seasonal models and spurious regressions," Journal of Econometrics, Elsevier, vol. 61(2), pages 259-272, April. [Downloadable!] (restricted)
  13. Franses, P.H. & Arno, M.A. & Hobijn, R., 1997. "Are Many Current Seasonally Adjusted Data Downward Biased?," Papers 9717/a, Erasmus University of Rotterdam - Econometric Institute.
  14. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October. [Downloadable!] (restricted)
  15. Lee, Hahn Shik, 1992. "Maximum likelihood inference on cointegration and seasonal cointegration," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 1-47. [Downloadable!] (restricted)
  16. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier. [Downloadable!] (restricted)
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  1. Francisco Rosende & Matías Tapia, 2006. "La Caída de la Inflación en Chile: Políticas, Instituciones y Suerte," Documentos de Trabajo 308, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  2. Dumitru, Ionut, 2002. "Money Demand in Romania," MPRA Paper 10629, University Library of Munich, Germany. [Downloadable!]
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