U.S. Money Demand Instability: A Flexible Least Squares Approach
This study uses the Flexible Least Squares method for Time-Varying Linear Regression (FLS-TVLR) to investigate coefficient stability for the Goldfeld U.S. money demand model over the volatile period 1959:Q2 to 1985:Q3. The only constraint imposed on coefficient variation over time is a smoothness prior. Nevertheless, the time paths traced out by the FLS-TVLR coefficient estimates exhibit systematic idiosyncratic time variations as well as simultaneous shift movements in 1974 during the time of the first oil price shock. Moreover, the FLS-TVLR estimates also indicate that the "unit root" nonstationarity problem reported by OLS money demand studies disappears if the coefficients are allowed to exhibit even small amounts of time variation. Annotated pointers to related work can be accessed here: http://www.econ.iastate.edu/tesfatsi/flshome.htm
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|Date of creation:||01 Feb 1990|
|Date of revision:|
|Publication status:||Published in Journal of Economic Dynamics and Control, February 1990, vol. 14 no. 1, pp. 151-173|
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Web page: http://www.econ.iastate.edu
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