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Modelling Short-run Money Demand for the USA

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  • Marcus Scheiblecker

    (WIFO)

Abstract

Nowadays, modelling long-term money demand is largely unambiguous. There is a vast amount of empirical evidence concerning a cointegrating relationship between money demand, some kind of interest rate and income. In contrast to this, short-run dynamics are still opaque. In the existing literature, the return to steady state is modelled quite differently. Simple error correction models have failed in some cases to explain short-run dynamics adequately. Partial-adjustment models allow for a smooth return to equilibrium as costs for adjusting real money balances lead to a sticky behaviour of actual money. Other authors model the return to steady state in a non-linear error correction form, instead. All these models consider disequilibria by the gap between money demand and its steady state of only the last period, disregarding disequilibria in periods before. Ignoring deviations from steady state occurred further in the past miss to account for money stockpiling activities of economic agents. I use a model where weights for cumulating are geometrically decreasing the more they are located in the past. According to Koyck (1954) such models possess an ARMA (1,1) representation. The combination of the Koyck-model with the error correction approach leads to an ARMAX model which is shown to be capable in some cases to track money demand short-run dynamics better and more parsimony than partial-adjustment models.

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Bibliographic Info

Paper provided by WIFO in its series WIFO Working Papers with number 442.

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Length: 14 pages
Date of creation: 19 Dec 2012
Date of revision:
Handle: RePEc:wfo:wpaper:y:2012:i:442

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  1. Calza, Alessandro & Zaghini, Andrea, 2006. "Non-linear dynamics in the euro area demand for M1," Working Paper Series 0592, European Central Bank.
  2. Engsted, Tom & Gonzalo, Jesus & Haldrup, Niels, 1997. "Testing for multicointegration," Economics Letters, Elsevier, vol. 56(3), pages 259-266, November.
  3. Scheiblecker, Marcus, 2013. "Between cointegration and multicointegration: Modelling time series dynamics by cumulative error correction models," Economic Modelling, Elsevier, vol. 31(C), pages 511-517.
  4. Dennis Hoffman & Robert H. Rasche, 1989. "Long-run Income and Interest Elasticities of Money Demand in the United States," NBER Working Papers 2949, National Bureau of Economic Research, Inc.
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  8. Johansen, Soren, 2006. "Statistical analysis of hypotheses on the cointegrating relations in the I(2) model," Journal of Econometrics, Elsevier, vol. 132(1), pages 81-115, May.
  9. Dreger, Christian & Wolters, J├╝rgen, 2010. "Investigating M3 money demand in the euro area," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 111-122, February.
  10. Duca, John V, 2000. "Financial Technology Shocks and the Case of the Missing M2," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 820-39, November.
  11. Laurence Ball, 2002. "Short-Run Money Demand," NBER Working Papers 9235, National Bureau of Economic Research, Inc.
  12. Franses, Philip Hans & van Oest, Rutger, 2007. "On the econometrics of the geometric lag model," Economics Letters, Elsevier, vol. 95(2), pages 291-296, May.
  13. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
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