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Fractional Cointegration And Aggregate Money Demand Functions




In this paper we examine aggregate money demand relationships in five industrial countries using a two-step strategy for testing the null hypothesis of no cointegration against alternatives that are fractionally cointegrated. Fractional cointegration would imply that, although there exists a long-run relationship, the equilibrium errors exhibit slow reversion to zero, i.e. that the error correction term possesses long memory, and hence deviations from equilibrium are highly persistent. It is found that the null hypothesis of no cointegration cannot be rejected for Japan. In contrast, there is some evidence of fractional cointegration for the remaining countries, i.e. Germany, Canada, the USA and the UK (where, however, the negative income elasticity that is found is not theory-consistent). Consequently, it appears that money targeting might be the appropriate policy framework for monetary authorities in the first three countries, but not in Japan or in the UK. Copyright Blackwell Publishing Ltd and The University of Manchester, 2005.

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  • Guglielmo Maria Caporale & Luis A. Gil-Alana, 2005. "Fractional Cointegration And Aggregate Money Demand Functions," Manchester School, University of Manchester, vol. 73(6), pages 737-753, December.
  • Handle: RePEc:bla:manchs:v:73:y:2005:i:6:p:737-753

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    References listed on IDEAS

    1. Javier Hualde & Peter M. Robinson, 2002. "Root-n-Consistent Estimation of Weak Fractional Cointegration," Faculty Working Papers 08/02, School of Economics and Business Administration, University of Navarra.
    2. Hassler, Uwe & Breitung, Jörg, 2002. "A Residual-Based LM Test for Fractional Cointegration," Darmstadt Discussion Papers in Economics 114, Darmstadt University of Technology, Department of Law and Economics.
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    Cited by:

    1. Kumar, Saten & Webber, Don J. & Fargher, Scott, 2013. "Money demand stability: A case study of Nigeria," Journal of Policy Modeling, Elsevier, vol. 35(6), pages 978-991.
    2. Carlos P. Barros & Guglielmo Maria Caporale & Luis A. Gil-Alana, 2014. "Long Memory in Angolan Macroeconomic Series: Mean Reversion versus Explosive Behaviour," African Development Review, African Development Bank, vol. 26(1), pages 59-73, March.
    3. repec:rfh:bbejor:v:6:y:2017:i:1:p:45-57 is not listed on IDEAS
    4. Tang, Chor Foon, 2007. "The stability of money demand function in Japan: Evidence from rolling cointegration approach," MPRA Paper 19807, University Library of Munich, Germany.
    5. Kumar, Saten, 2011. "Financial reforms and money demand: Evidence from 20 developing countries," Economic Systems, Elsevier, vol. 35(3), pages 323-334, September.
    6. Wei Liao & Sampawende J Tapsoba, 2014. "China’s Monetary Policy and Interest Rate Liberalization; Lessons from International Experiences," IMF Working Papers 14/75, International Monetary Fund.
    7. Saten Kumar & Mamta B. Chowdhury & B. Bhaskara Rao, 2013. "Demand for money in the selected OECD countries: a time series panel data approach and structural breaks," Applied Economics, Taylor & Francis Journals, vol. 45(14), pages 1767-1776, May.
    8. Théophile T. Azomahou & Tapas Mishra & Mamata Parhi, 2015. "Economic Growth under Stochastic Population and Pollution Shocks," Manchester School, University of Manchester, vol. 83(3), pages 314-345, June.

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