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Money and prices: An I(2) analysis for the euro area

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  • Holtemöller, Oliver

Abstract

The concept of integrated stochastic processes is widely used in empirical macroeconomics; and cointegration analysis is an important framework to analyze economic time series both in single equation and in system approaches. This framework is not only suited to study the relationships between variables that are integrated of order one, denoted by I(1), but also to analyze variables that are integrated of higher order. However, in the literature the analysis of I(1) models is much more popular than the analysis of I(2) models although there is some evidence that relevant economic times series like nominal money and the price level in the euro area are integrated of order two. This is confirmed by applying tests on double unit roots. The purpose of this paper is to illustrate the analysis of I(2) variables and to show how this technique can be applied to explore the relationship between money and prices. The leading indicator property of money for prices, money demand analysis and the role of money in the transmission mechanism are addressed. It turns out that the I(2) analysis provides a considerable empirical method for extracting information from monetary aggregates for monetary policy purposes. --

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Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2002,12.

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Date of creation: 2002
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Handle: RePEc:zbw:sfb373:200212

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Keywords: cointegration; Double unit roots; I(2) model; euro area money demand;

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  1. Rahbek, Anders & Christian Kongsted, Hans & Jorgensen, Clara, 1999. "Trend stationarity in the I(2) cointegration model," Journal of Econometrics, Elsevier, Elsevier, vol. 90(2), pages 265-289, June.
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  6. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Working Papers, Bank of Canada 99-5, Bank of Canada.
  7. Paruolo, Paolo & Rahbek, Anders, 1999. "Weak exogeneity in I(2) VAR systems," Journal of Econometrics, Elsevier, Elsevier, vol. 93(2), pages 281-308, December.
  8. Juselius, Katarina, 1998. "A Structured VAR for Denmark under Changing Monetary Regimes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 16(4), pages 400-411, October.
  9. Mosconi, Rocco & Giannini, Carlo, 1992. "Non-causality in Cointegrated Systems: Representation Estimation and Testing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 399-417, August.
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  12. Paruolo, Paolo, 2000. "Asymptotic Efficiency Of The Two Stage Estimator In I (2) Systems," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 16(04), pages 524-550, August.
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  16. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series, European Central Bank 0006, European Central Bank.
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  21. Holtemöller, Oliver, 2002. "Structural vector autoregressive models and monetary policy analysis," SFB 373 Discussion Papers 2002,7, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  22. repec:wop:humbsf:2002-7 is not listed on IDEAS
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