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Money Demand in the euro area, the US and the UK:Assessing the Role of Nonlinearity

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Abstract

This paper estimates money demand equations for the euro area, the US and the UK using three different econometric methodologies: (i) a linear model based on a dynamic ordinary least squares (DOLS); (ii) a nonlinear technique based on a quantile regression framework; and (iii) a nonlinear model relying on a smooth-transition regression. The linear model shows that the elasticity of money demand with respect to income is positive and large in magnitude, while the elasticity of money demand with respect to the interest rate is negative and generally small. The quantile regression technique highlights that: (i) the income and the interest rate semi-elasticities are significantly different from the OLS estimates at the tails of the distribution of real money holdings; and (ii) the sensitivity of money demand with respect to inflation tends to be larger when real money holdings are extremely low. Finally, the smooth transition model provides two interesting findings. On the one hand, they capture reasonably well the dynamics of the money demand function. On the other hand, they show that the elasticity of money demand with respect to inflation rate, interest rate and GDP varies not only in accordance with the regime considered, but also across the countries under consideration.

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  • Fredj Jawadi & Ricardo M. Sousa, 2012. "Money Demand in the euro area, the US and the UK:Assessing the Role of Nonlinearity," NIPE Working Papers 22/2012, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:22/2012
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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. Dufrénot, Gilles & Khayat, Guillaume A., 2017. "Monetary Policy Switching In The Euro Area And Multiple Steady States: An Empirical Investigation," Macroeconomic Dynamics, Cambridge University Press, vol. 21(05), pages 1175-1188, July.
    3. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    4. Gilles Dufrénot & Anwar Khayat, 2014. "Monetary Policy Switching in the Euro Area and Multiple Equilibria: An Empirical Investigation," Working Papers halshs-00973504, HAL.
    5. Claudiu Tiberiu Albulescu & Dominique Pépin, 2018. "Money demand stability, monetary overhang and inflation forecast in the CEE countries," Working Papers hal-01720319, HAL.
    6. Helmi Hamdi & Ali Said & Rashid Sbia, 2015. "Empirical Evidence on the Long-Run Money Demand Function in the Gulf Cooperation Council Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 603-612.
    7. PELINESCU, Elena & SIMIONESCU, Mihaela, 2014. "Modelling And Predicting The Real Money Demand In Romania," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 1(1), pages 117-124.
    8. Samba Michel Cyrille, 2015. "International Reserves Holdings in the CEMAC Area: Adequacy and Motives," African Development Review, African Development Bank, vol. 27(4), pages 415-427, December.
    9. Jiranyakul, Komain & Opiela, Timothy, 2014. "An Empirical Test of Money Demand in Thailand from 1993 to 2012," MPRA Paper 54162, University Library of Munich, Germany.

    More about this item

    Keywords

    money demand; dynamic OLS; smooth transition; quantile regression.;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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