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Nonlinearities In The Dynamics Of The Euro Area Demand For M1

  • Calza, Alessandro
  • Zaghini, Andrea

The paper finds evidence of non-linearities in the dynamics of the euro-area demand for the narrow aggregate M1. A long-run money demand relationship is first estimated over a sample period covering the last three decades. While the parameters of the relationship are jointly stable, there are indications of non-linearity in the residuals of the error-correction model. This non-linearity is explicitly modelled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of non-linearities in the dynamics of adjustment to equilibrium stemming from "buffer stock" and "target-threshold" models and with analogous empirical evidence for European countries and the US.

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 13 (2009)
Issue (Month): 01 (February)
Pages: 1-19

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Handle: RePEc:cup:macdyn:v:13:y:2009:i:01:p:1-19_07
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  1. Stracca, Livio, 2001. "The functional form of the demand for euro area M1," Working Paper Series 0051, European Central Bank.
  2. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
  3. Bierens, Herman J., 1997. "Nonparametric cointegration analysis," Journal of Econometrics, Elsevier, vol. 77(2), pages 379-404, April.
  4. Arthur E. Gandolfi & James R. Lothian, 1980. "International Price Behavior and the Demand for Money," NBER Working Papers 0602, National Bureau of Economic Research, Inc.
  5. William Barnett, 2004. "Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200413, University of Kansas, Department of Economics, revised Nov 2004.
  6. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
  7. Camacho, Maximo, 2005. "Markov-switching stochastic trends and economic fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 135-158, January.
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