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Modelling of Structural Changes in Demand for Money Cointegration Relations

  • Hannu Koskinen


    (School of Business and Economics, University of Jyväskylä, Finland)

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    In this paper the multivariate cointegration technique coupled with a smooth nonlinear trend of time is applied to model the demand for money. Unmodelled gradual structural changes in the cointegration parameters affect the specification of the cointegration relations so that the number of cointegrating vectors found by linear methodology is smaller than suggested by the economic theory. Here the demand for broad money in Finland during 1980–1996 is analysed. It turns out that, if the cointegrated VAR model is extended with a suitable nonlinear deterministic trend of time related to the intercept term, then the missing cointegration relation between broad money and the scale variable is found and the cointegration space can then be identified.

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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 17 (2004)
    Issue (Month): 2 (Autumn)
    Pages: 63-72

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    Handle: RePEc:fep:journl:v:17:y:2004:i:2:p:63-72
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    1. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-11, July.
    2. He, Changli & Teräsvirta, Timo & González, Andres, 2002. "Testing parameter constancy in stationary vector autoregressive models against continuous change," SSE/EFI Working Paper Series in Economics and Finance 507, Stockholm School of Economics, revised 06 May 2004.
    3. Katarina Juselius, 1998. "Changing monetary transmission mechanisms within the EU," Empirical Economics, Springer, vol. 23(3), pages 455-481.
    4. Lanne , Markku, 2002. "Nonlinear dynamics of interest rate and inflation," Research Discussion Papers 21/2002, Bank of Finland.
    5. Simon M. Potter, 1999. "Nonlinear time series modelling: an introduction," Staff Reports 87, Federal Reserve Bank of New York.
    6. Bent Nielsen & Soren Johansen & Rocco Mosconi, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Economics Series Working Papers 2000-W22, University of Oxford, Department of Economics.
    7. Ripatti, Antti & null, Pentti, 2001. "Vector Autoregressive Processes With Nonlinear Time Trends In Cointegrating Relations," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 577-597, September.
    8. repec:cup:macdyn:v:5:y:2001:i:4:p:577-97 is not listed on IDEAS
    9. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
    10. Saikkonen, Pentti, 2001. "Consistent Estimation In Cointegrated Vector Autoregressive Models With Nonlinear Time Trends In Cointegrating Relations," Econometric Theory, Cambridge University Press, vol. 17(02), pages 296-326, April.
    11. Carlo C. A. Winder & Martin M. G. Fase, 1998. "Wealth and the demand for money in the European union," Empirical Economics, Springer, vol. 23(3), pages 507-524.
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