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U.S. Money Demand Instability: A Flexible Least Squares Approach

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  • Tesfatsion, Leigh S.
  • Veitch, J.

Abstract

This study uses the Flexible Least Squares method for Time-Varying Linear Regression (FLS-TVLR) to investigate coefficient stability for the Goldfeld U.S. money demand model over the volatile period 1959:Q2 to 1985:Q3. The only constraint imposed on coefficient variation over time is a smoothness prior. Nevertheless, the time paths traced out by the FLS-TVLR coefficient estimates exhibit systematic idiosyncratic time variations as well as simultaneous shift movements in 1974 during the time of the first oil price shock. Moreover, the FLS-TVLR estimates also indicate that the "unit root" nonstationarity problem reported by OLS money demand studies disappears if the coefficients are allowed to exhibit even small amounts of time variation. Annotated pointers to related work can be accessed here: http://www.econ.iastate.edu/tesfatsi/flshome.htm

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 11193.

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Date of creation: 01 Feb 1990
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Publication status: Published in Journal of Economic Dynamics and Control, February 1990, vol. 14 no. 1, pp. 151-173
Handle: RePEc:isu:genres:11193

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Cited by:
  1. Markus Ebner & Thorsten Neumann, 2005. "Time-Varying Betas of German Stock Returns," Financial Markets and Portfolio Management, Springer, Springer, vol. 19(1), pages 29-46, June.
  2. VĂȘlayoudom Marimoutou & Denis Peguin & Anne Peguin-Feissolle, 2009. "The "distance-varying" gravity model in international economics: is the distance an obstacle to trade?," Post-Print hal-00389570, HAL.
  3. Ling He & Alan Reichert, 2003. "Time variation paths of factors affecting financial institutions and stock returns," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 31(1), pages 71-86, March.
  4. Dorfman, Jeffrey H. & Foster, Kenneth A., 1991. "Estimating Productivity Changes With Flexible Coeficients," Western Journal of Agricultural Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 16(02), December.
  5. Kuethe, Todd H. & Foster, Kenneth A. & Florax, Raymond J.G.M., 2008. "A Spatial Hedonic Model with Time-Varying Parameters: A New Method Using Flexible Least Squares," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 6306, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Stephen M. Miller & Luis F. Martins & Rangan Gupta, 2014. "A Time-Varying Approach of the US Welfare Cost of Inflation," Working Papers 201419, University of Pretoria, Department of Economics.
  7. Poray, Michael C. & Foster, Kenneth A. & Dorfman, Jeffrey H., 2000. "Measuring An Almost Ideal Demand System With Generalized Flexible Least Squares," 2000 Annual meeting, July 30-August 2, Tampa, FL, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21796, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Kalaba, Robert E. & Tesfatsion, Leigh S., 1996. "A Multicriteria Approach to Model Specification and Estimation," Staff General Research Papers, Iowa State University, Department of Economics 1684, Iowa State University, Department of Economics.
  9. He, Ling T., 2005. "Instability and predictability of factor betas of industrial stocks: The Flexible Least Squares solutions," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 45(4-5), pages 619-640, September.
  10. Ling T. He, & James. R. Webb & Neil Myer, 2003. "Interest Rate Sensitivities of REIT Returns," International Real Estate Review, Asian Real Estate Society, Asian Real Estate Society, vol. 6(1), pages 1-21.
  11. Kim, Man-Keun & Lee, Andrew C., 2005. "Time Varying Coefficient: An Application of Flexible Least Squares to Cattle Captive Supply," 2005 Annual meeting, July 24-27, Providence, RI, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19124, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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