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Money demand function estimation by nonlinear cointegration

Author

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  • Youngsoo Bae

    (Department of Economics, Ohio State University, Columbus, OH, USA)

  • Robert M. de Jong

    (Department of Economics, Ohio State University, Columbus, OH, USA)

Abstract

Conventionally, the money demand function is estimated using a regression of the logarithm of money demand on either the interest rate or the logarithm of the interest rate. This equation is presumed to be a cointegrating regression. In this paper, we aim to combine the logarithmic specification, which models the liquidity trap better than a linear model, with the assumption that the interest rate itself is an integrated process. The proposed technique is robust to serial correlation in the errors. For the USA, our new technique results in larger coefficient estimates than previous research suggested, and produces superior out-of-sample prediction. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Youngsoo Bae & Robert M. de Jong, 2007. "Money demand function estimation by nonlinear cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(4), pages 767-793.
  • Handle: RePEc:jae:japmet:v:22:y:2007:i:4:p:767-793
    DOI: 10.1002/jae.915
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Stephen M. Miller & Luis F. Martins & Rangan Gupta, 2014. "A Time-Varying Approach of the US Welfare Cost of Inflation," Working Papers 201419, University of Pretoria, Department of Economics.
    2. Deepankar Basu, 2009. "The Paradox of Thrift and Crowding-In of Private Investment in a Simple IS-LM Model," UMASS Amherst Economics Working Papers 2009-14, University of Massachusetts Amherst, Department of Economics.
    3. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    4. doğru, bülent, 2013. "Dynamic Analysis of Money Demand Function: Case of Turkey," MPRA Paper 48402, University Library of Munich, Germany.
    5. Gomez-Biscarri, Javier & Hualde, Javier, 2015. "A residual-based ADF test for stationary cointegration in I(2) settings," Journal of Econometrics, Elsevier, vol. 184(2), pages 280-294.
    6. Shahbaz, Muhammad & Shahzad, Syed Jawad Hussain & Alam, Shaista & Apergis, Nicholas, 2018. "Globalisation, Economic Growth and Energy Consumption in the BRICS Region: The Importance of Asymmetries," MPRA Paper 86979, University Library of Munich, Germany, revised 16 May 2018.
    7. Kristensen, Dennis & Rahbek, Anders, 2010. "Likelihood-based inference for cointegration with nonlinear error-correction," Journal of Econometrics, Elsevier, vol. 158(1), pages 78-94, September.
    8. Rostom,Ahmed Mohamed Tawfick, 2016. "Money demand in the Arab Republic of Egypt : a vector equilibrium correction model," Policy Research Working Paper Series 7679, The World Bank.
    9. Kim, Chang Sik & Kim, In-Moo, 2012. "Partial parametric estimation for nonstationary nonlinear regressions," Journal of Econometrics, Elsevier, vol. 167(2), pages 448-457.
    10. Inagaki, Kazuyuki, 2009. "Estimating the interest rate semi-elasticity of the demand for money in low interest rate environments," Economic Modelling, Elsevier, vol. 26(1), pages 147-154, January.
    11. Choi, Chi-Young & Hu, Ling & Ogaki, Masao, 2008. "Robust estimation for structural spurious regressions and a Hausman-type cointegration test," Journal of Econometrics, Elsevier, vol. 142(1), pages 327-351, January.
    12. Nakashima, Kiyotaka, 2008. "An Extremely Low Interest Rate Policy and the Shape of the Japanese Money Demand Function: A Nonlinear Cointegration Approach," MPRA Paper 70689, University Library of Munich, Germany.
    13. Nakashima, Kiyotaka & Saito, Makoto, 2012. "On the comparison of alternative specifications for money demand: The case of extremely low interest rate regimes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(3), pages 454-471.
    14. Choudhry, Taufiq & Hassan, Syed S., 2015. "Exchange rate volatility and UK imports from developing countries: The effect of the global financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 89-101.
    15. Ward, Felix & Chen, Yao, 2016. "Rigid relations: External adjustment under the Gold Standard (1880-1913)," Annual Conference 2016 (Augsburg): Demographic Change 145930, Verein für Socialpolitik / German Economic Association.
    16. Chan, Nigel & Wang, Qiying, 2015. "Nonlinear regressions with nonstationary time series," Journal of Econometrics, Elsevier, vol. 185(1), pages 182-195.
    17. YABE, Ryota, 2014. "Empirical Likelihood Confidence Intervals for Nonparametric Nonlinear Nonstationary Regression Models," Discussion Papers 2014-20, Graduate School of Economics, Hitotsubashi University.
    18. Takayuki Tsuruga & Shota Wake, 2018. "Money-Financed Fiscal Stimulus: The Effects of Implementation Lag," ISER Discussion Paper 1038, Institute of Social and Economic Research, Osaka University.

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