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A Component® based Analysis of the danish Long-run Money Demand Relation

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  • Lisbeth Funding la Cour

    (Institute of Statistics, University of Copenhagen)

Abstract

This paper examines the relation between monetary asset components and some of the variables that traditionally enter into aggregate money demand relations. The analysis is performed on Danish data within the natural frame-work of a multivariate econometric model. The purpose of the study is to investigate issues in relation to the level and weighting of a monetary aggregate. We show that within this model it is possible to identify monetary aggregates at different levels of aggregation and that for the narrow aggregate (M1) equal weighting of the components are permitted. For the broader aggregates (M2) or (M2-M1) equal weighting is no longer appropriate. These findings are not contradictory to what we would expect from aggregation and index number theory. Finally, an attempt to identify the whole stationary (or long-run) structure of the system is made, and we find a co-existence of a liquid and a less liquid money demand relation pointing towards the possibility of splitting the total money demand relation with respect to different motives for holding money.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 95-18.

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Length: 20 pages
Date of creation: Dec 1995
Date of revision:
Handle: RePEc:kud:kuiedp:9518

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References

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  1. Bordo, Michael D. & Jonung, Lars, 1990. "The long-run behavior of velocity: The institutional approach revisited," Journal of Policy Modeling, Elsevier, vol. 12(2), pages 165-197.
  2. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  3. Spanos, Aris, 1984. "Liquidity as a Latent Variable-An Application of the MIMIC Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 46(2), pages 125-43, May.
  4. 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.
  5. William Barnett, 2005. "Monetary Aggregation," Macroeconomics 0503017, EconWPA.
  6. Johansen, Søren, 1992. "A Representation of Vector Autoregressive Processes Integrated of Order 2," Econometric Theory, Cambridge University Press, vol. 8(02), pages 188-202, June.
  7. David E. Laidler, 1988. "Taking Money Seriously," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 687-713, November.
  8. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  9. Johansen, S., 1991. "A Statistical Analsysis of Cointegration for I(2) Variables," Papers 77, Helsinki - Department of Economics.
  10. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  11. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
  12. Clements, Kenneth W. & Nguyen, Phuong, 1980. "Economic monetary aggregates--comment," Journal of Econometrics, Elsevier, vol. 14(1), pages 49-53, September.
  13. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
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