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The Long Run Demand for Broad Money in Australia Subject to Regime Shifts

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  • Felmingham, B.
  • Zhang, Q.
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    Abstract

    The goal is to determine if there is a stable Broad Money Demand relationship for Australia. Previous studies have not reached a consensus on this important issue, partly because the time series techniques used do not accommodate structural breaks. A standard multivariate cointegration analysis is conducted on monthly data over the period 1976 to 1998. It reveals some evidence for the presence of cointegration since one cointegrating vector is found. This involves broad money, the spread between interest on broad money and on non-money assets and real GDP. The evidence of cointegration is again present when a structural break is found in the relationship using Gregory and Hansen (GH) methodology. This occurs in 1991 coinciding with a deep recession and policy induced, interest rate reductions. The income elasticity of demand exceeds one, reacts positively to the interest spread and negatively to inflation.

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    Bibliographic Info

    Paper provided by Tasmania - Department of Economics in its series Papers with number 2000-07.

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    Length: 12 pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:fth:tasman:2000-07

    Contact details of provider:
    Postal: UNIVERSITY OF TASMANIA, DEPARTMENT OF ECONOMICS, HOBART TASMANIA 7001 AUSTRALIA.
    Phone: +61 3 6226 7672
    Fax: +61 3 6226 7587
    Web page: http://www.utas.edu.au/economics-finance/
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    Keywords: TIME SERIES ; DATA ANALYSIS ; METHODOLOGY;

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    References

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    1. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
    2. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
    3. Juan Luis Vega, 1998. "Money demand stability: Evidence from Spain," Empirical Economics, Springer, vol. 23(3), pages 387-400.
    4. Antti Ripatti, 1998. "Stability of the demand for M1 and harmonized M3 in Finland," Empirical Economics, Springer, vol. 23(3), pages 317-337.
    5. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, Econometric Society, vol. 55(5), pages 1035-56, September.
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    7. 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.
    8. Pagan, Adrian R & Volker, Paul A, 1981. "The Short-run Demand for Transactions Balances in Australia," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 48(192), pages 381-95, November.
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    11. Neil R. Ericsson, 1998. "Empirical modeling of money demand," Empirical Economics, Springer, vol. 23(3), pages 295-315.
    12. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
    13. Glenn Stevens & Susan Thorp & John Anderson, 1987. "The Australian Demand Function for Money: Another Look at Stability," RBA Research Discussion Papers rdp8701, Reserve Bank of Australia.
    14. Park, Joon Y. & Phillips, Peter C.B., 1989. "Statistical Inference in Regressions with Integrated Processes: Part 2," Econometric Theory, Cambridge University Press, vol. 5(01), pages 95-131, April.
    15. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-60, August.
    16. Karfakis, Costas I & Parikh, Ashok, 1993. "A Cointegration Approach to Monetary Targeting in Australia," Australian Economic Papers, Wiley Blackwell, vol. 32(60), pages 53-72, June.
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