Note on the Stability of Long-Run Money Demand: Is the Interest Elasticity Really Constant?
This note reexamines the recent evidence by Hoffman, Rasche and Tieslau (1995) that cointegrating M1 demand relationships are stable in postwar industrial countries particularly when the restriction of a unit income elasticity is imposed. We apply Gregory and Hansen's (1996) residual-based test for cointegration with a possible break in the cointegrating vector in an unknown timing. Under a bivariate model where the restriction is imposed, the empirical evidence consistently suggests the possibility of a shift in the interest elasticity in postwar U.S., Canada, and (weakly) Japan.
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|Date of creation:||May 1998|
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