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The Long Run Demand For Broad Money in Australia Subject to Regime Shifts

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Listed author(s):
  • Felmingham, Bruce
  • Zhang, Qing

Abstract

The goal is to determine if there is a stable Broad Money demand relationship for Australia. Previous studies have not reached a consensus on this important issue, partly because the time series techniques used do not accommodate structural breaks. A standard multivariate cointegration analysis is conducted on monthly data over the period 1976(3) to 1998(4). It reveals some evidence for the presence of cointegration since one cointegrating vector is found. This involves broad money, the spread between interest on broad money and on non-money assets and real GDP. The evidence of cointegration is again present when a structural break is found in the relationship using Gregory and Hansen (GH) methodology. This occurs in 1991 coinciding with a deep recession and policy induced, interest rate reductions. The income elasticity of demand exceeds one, reacts positively to the interest spread and negatively to inflation. Copyright 2001 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

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Article provided by Wiley Blackwell in its journal Australian Economic Papers.

Volume (Year): 40 (2001)
Issue (Month): 2 (June)
Pages: 146-155

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Handle: RePEc:bla:ausecp:v:40:y:2001:i:2:p:146-55
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  1. Karfakis, Costas I & Parikh, Ashok, 1993. "A Cointegration Approach to Monetary Targeting in Australia," Australian Economic Papers, Wiley Blackwell, vol. 32(60), pages 53-72, June.
  2. Pagan, Adrian R & Volker, Paul A, 1981. "The Short-run Demand for Transactions Balances in Australia," Economica, London School of Economics and Political Science, vol. 48(192), pages 381-395, November.
  3. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  4. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  5. Adrian Blundell-Wignall & Susan Thorp, 1987. "Money Demand, Own Interest Rates and Deregulation," RBA Research Discussion Papers rdp8703, Reserve Bank of Australia.
  6. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
  7. repec:bla:restud:v:57:y:1990:i:1:p:99-125 is not listed on IDEAS
  8. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
  9. Macfarlane, I J, 1999. "Australian Monetary Policy in the Last Quarter of the Twentieth Century," The Economic Record, The Economic Society of Australia, vol. 75(230), pages 213-224, September.
  10. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-1056, September.
  11. Glenn Stevens & Susan Thorp & John Anderson, 1987. "The Australian Demand Function for Money: Another Look at Stability," RBA Research Discussion Papers rdp8701, Reserve Bank of Australia.
  12. Antti Ripatti, 1998. "Stability of the demand for M1 and harmonized M3 in Finland," Empirical Economics, Springer, vol. 23(3), pages 317-337.
  13. Hansen, Bruce E., 1992. "Efficient estimation and testing of cointegrating vectors in the presence of deterministic trends," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 87-121.
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Cited by:

  1. Saten Kumar & Don J. Webber, 2013. "Australasian money demand stability: application of structural break tests," Applied Economics, Taylor & Francis Journals, vol. 45(8), pages 1011-1025, March.
  2. Abbas Valadkhani, 2008. "Long- and Short-Run Determinants of the Demand for Money in the Asian-Pacific Countries: An Empirical Panel Investigation," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 77-90, May.
  3. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611.
  4. Valadkhani, Abbas, 2006. "What Determines the Demand for Money in the Asian-Pacific Countries? An Empirical Panel Investigation," Economics Working Papers wp06-11, School of Economics, University of Wollongong, NSW, Australia.
  5. Abbas Valadkhani, 2005. "Modelling Demand For Broad Money In Australia ," Australian Economic Papers, Wiley Blackwell, vol. 44(1), pages 47-64, 03.
  6. Robert Tchaidze & Salome Tvalodze, 2011. "Deposit Formation in Georgia," IMF Working Papers 11/78, International Monetary Fund.
  7. Abbas Valadkhani, 2003. "Long and Short-Run Determinants of Money Demand in New Zealand: Evidence from Cointegration Analysis," School of Economics and Finance Discussion Papers and Working Papers Series 132, School of Economics and Finance, Queensland University of Technology.
  8. Tom Cusbert & Thomas Rohling, 2013. "Currency Demand during the Global Financial Crisis: Evidence from Australia," RBA Research Discussion Papers rdp2013-01, Reserve Bank of Australia.
  9. Abbas Valadkhani & Mohammad Alauddin, 2003. "Demand for M2 in Developing Countries: An Empirical Panel Investigation," School of Economics and Finance Discussion Papers and Working Papers Series 149, School of Economics and Finance, Queensland University of Technology.

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