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Long-run Money Demand in OECD Countries – Cross-Member Cointegration

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  • Dobnik, Frauke

Abstract

This paper examines the long-run money demand function for 11 OECD countries from 1983 to 2006 using panel data and including wealth. The distinction between common factors and idiosyncratic components using principal component analysis allows to detect cross-member cointegration and to distinguish between international and national developments as drivers of the long-run relation between money and its determinants. Indeed, cointegration between the common factors of the underlying variables, i.e. cross-member cointegration, indicates that the long-run relationship is mainly driven by international stochastic trends. Furthermore, it is found that the impact of income on money demand is positive, while it is negative for the interest rate and stock prices. The estimated (semi-)elasticities of money are larger for the common factors than for the original variables, except the income elasticity. Finally, the results of a panel-based error-correction model suggest that money demand converges to an international cross-member equilibrium relation of the common factors.

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  • Dobnik, Frauke, 2011. "Long-run Money Demand in OECD Countries – Cross-Member Cointegration," Ruhr Economic Papers 237, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:237
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    Cited by:

    1. Ralph Setzer & Guntram Wolff, 2013. "Money demand in the euro area: new insights from disaggregated data," International Economics and Economic Policy, Springer, vol. 10(2), pages 297-315, June.
    2. Vasilev, Aleksandar, 2022. "A business-cycle model with money-in-utility (MIU) and government sector: the case of Bulgaria (1999-2020)," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(forthcomi).
    3. Ingrid Groessl & Artur Tarassow, 2015. "A Microfounded Model of Money Demand Under Uncertainty, and some Empirical Evidence," Macroeconomics and Finance Series 201504, University of Hamburg, Department of Socioeconomics, revised Jan 2018.

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    More about this item

    Keywords

    money demand; wealth effects; panel unit roots; vector error-correction models;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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