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Modelling and forecasting money demand: divide and conquer

Author

Listed:
  • César Carrera

    (Banco Central de Reserva del Perú)

  • Jairo Flores

    (Banco Central de Reserva del Perú)

Abstract

The literature on money demand suggests several specification forms of empirical functions that better describe observed data on money in circulation. In a first stage, we select the best long-run model specification for a money demand function at the aggregate level based on forecast performance. On a second stage we divide the money in circulation by denomination and argue that determinants of a low-level denomination is different than those of a high-level. We then estimate the best model specification for each denomination and aggregate each forecast in order to have an aggregate proyection. We finally compare forecasts between these strategies. Our results indicate that the bottom-up approach has a better performance than the traditional view of directly forecasting the aggregate.

Suggested Citation

  • César Carrera & Jairo Flores, 2017. "Modelling and forecasting money demand: divide and conquer," Working Papers 2017-91, Peruvian Economic Association.
  • Handle: RePEc:apc:wpaper:2017-091
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    References listed on IDEAS

    as
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    5. Carrera, Cesar, 2012. "Long-Run Money Demand in Latin-American countries: A Nonestationary Panel Data Approach," Working Papers 2012-016, Banco Central de Reserva del Perú.
    6. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, January.
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    More about this item

    Keywords

    Money demand; bottom-up; co-integration; forecast;

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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