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

  • Felmingham, Bruce
  • Zhang, Qing

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: 146-55

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Handle: RePEc:bla:ausecp:v:40:y:2001:i:2:p:146-55
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  1. Antti Ripatti, 1998. "Stability of the demand for M1 and harmonized M3 in Finland," Empirical Economics, Springer, vol. 23(3), pages 317-337.
  2. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-60, August.
  3. Adrian Blundell-Wignall & Susan Thorp, 1987. "Money Demand, Own Interest Rates and Deregulation," RBA Research Discussion Papers rdp8703, Reserve Bank of Australia.
  4. 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.
  5. 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 213-24, September.
  6. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
  7. 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 381-95, November.
  8. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
  9. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
  10. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  11. 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.
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