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Financial liberalization and the stationarity of money multiplier

  • Darrin Downes
  • Winston Moore
  • Dwayne Jackson

In countries without an explicit inflation targeting mechanism, a stable relationship between the monetary base and the money supply allows policymakers to implement changes in monetary policy with a reasonable degree of certainty about the impact on the money supply. The relationship can, however, be influenced by major structural shifts such as financial sector reforms. The present study finds that when structural change bought about by financial liberalisation is ignored, the unit root hypothesis is spuriously accepted. However, once this break is incorporated into the analysis, the multiplier exhibits no presence of a stochastic trend.

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Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 20 (2006)
Issue (Month): 2 ()
Pages: 227-240

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Handle: RePEc:taf:intecj:v:20:y:2006:i:2:p:227-240
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  1. 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.
  2. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  3. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-20, July.
  4. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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