Cointegration,error correction,and the demand for money in Mexico

Cointegration, Error Correction and the Demand for Money in Mexico. -Estimates of the long-run demand for narrow and broad definitions of the Mexican money supply over the period 1980Q1–1994Q1 suggest that a single cointegrating relationship exists for real money balances (M1 and M2), a scale variable (real GDP or real consumption expenditure), and the 91-day treasury bill rate. The results from short-run dynamic equations favor M2 as the monetary aggregate to target and suggest that real GDP rather than real private consumption is a more appropriate scale variable in the demand for money function for Mexico.     

Modelling the demand for broad money in the United States

The demand for money function occupies a central role in most theories of aggregate economic activity, especially in the formulation and execution of effective monetary policy. In this paper, estimates of the short- and long-run demand for broad money in the United States are obtained. The empirical evidence suggests that the relationship between the growth of money balances and its economic determinants is more stable than some have argued. Importantly, the out-of-sample forecasts presented here suggest that M2 growth in the 1980s is well predicted by an error-correction model that includes a variable representing the value of time and also uses real consumer spending as the short-run scale variable.     

Economic reform and the stability of the demand for money in Tanzania

This paper investigates whether there exists a stationary long-runequilibrium relationship between real money balances, real income,inflation and expected depreciation in Tanzania which can beidentified as a money demand function. As the institutionaland regulatory framework in Tanzania has undergone a seriesof changes since economic reforms began in the mid-1980s, shiftsin parameters over time might have occurred, causing instabilityin the money demand function. Using Johansen's maximum likelihoodand dynamic modelling procedure, the paper finds equilibriumin the long run and a stable money demand function. These findingsimply that, even though economic liberalization and relaxationof controls could have induced instability in the money demandfunction as conjectured in the literature, such instabilitywas not significant enough to inhibit the estimation of short-and long-run demand for money.     

开放经济条件下我国货币需求研究

文章引入股票流通市值、汇率等变量对开放经济条件下我国货币需求函数进行全面研究。协整和误差修正模型结果表明：汇率是除社会消费品零售总额外影响我国长短期货币需求稳定的最重要的变量,并且对我国货币需求的影响很大;股票市场发展对我国长期和短期货币需求的影响很小。这一发现可为我国当前反通货膨胀的货币政策的制订提供重要的参考。为控制货币供应量,我们应该重点关注汇率波动。     

Demand for broad money and expenditure components in Japan: an empirical study

The main objective of the present study is to examine empirically the long-run relation of broad money demand and its determinants in Japan. In contrast with previous study, the present study considers various components of final expenditure demand as determinants that are final consumption goods, expenditure on investment goods and exports. Using quarterly data over the period 1973Q1–2000Q2, the results of the bounds test [J. Appl. Econ. 16 (2001) 289] indicate a stable long-run relationship between demand of real M2 and its determinants. The empirical results also highlight that different domestic demand components yields different effects on Japanese broad money demand behavior. The estimated unrestricted error-correction model appears to track the data well and the results have important policy implications.     

Real wages,investment and employment: New evidence from West German sectoral data

Real Wages, Investment and Employment: New Evidence from West German Sectoral Data. — Non-separable capital adjustment costs imply that investment directly affects the demand for labour and therefore justify not only the lagged dependent variable but also the presence of investment expenditures or Tobin’s valuation ratio Q in labour demand estimation. On this basis, the authors estimate a very parsimonious specification of demand for blue-collar workers in a panel of 32 West German industries. They find much larger short-run real wage employment elasticities than previous research, and robustly significant positive effects of investment or Tobin’s Q on labour demand.     

P-Star as a link between money and prices in Germany

P-Star as a Link between Money and Prices in Germany. — The equilibrium price levelP-Star is defined as money per unit of potential output at equilibrium velocity. Deviations betweenP-Star and the actual price level (price gap) serve as an indicator of future price movements. To measure equilibrium velocity and to take into account its downward trend in Germany, a long-run money demand function is integrated into theP-Star approach. According to the empirical results, the constructed measure ofP-Star provides a stable link between M3 and the price level. However, comparable evidence could not be established for Ml and M2.     

PERSONAL SECTOR MONEY DEMAND IN THE UK

Non-parametric demand analysis is utilised to establish weaklyseparable subsets of monetary assets for the UK personal sectorin the context of a utility function consisting of durable andnon-durable consumption goods, services, leisure, and monetaryassets The admissible collections of assets are then combinedusing Divisia aggregation in order to produce monetary aggregateswhich are consistent with economic aggregation theory We investigatethe money demand properties of the aggregates and find relativelysimple, stable long-run money-demand functions for the UK personalsector with well determined error correction dynamics.     

The Stability of European Money Demand: An Investigation of M3H

The paper assesses the stability and predictive performance of a European money demand function as compared to national money demand functions. With respect to the explanatory accuracy, the national functions perform better than the aggregated function. Examination of the residuals of the national money demand equations indicates that currency substitution is not the major cause for the stability of the aggregated money demand function. The aggregate relation mainly seems to reflect German money demand. This conclusion is supported by the instability of aggregated money demand resulting from the exclusion of Germany from the aggregate.     

The Demand for Money in Brunei

Based on data for the 1974–95 period this paper estimates demand for narrow money and broad money in Brunei using the error-correction specification. Short-run and long-run elasticities are estimated with respect to real income, interest rate, expected price level and liquidity. Narrow money is quite responsive to changes in real income and interest rate in both the short and long terms. Broad money is income inelastic regardless of the time horizon, however, it is interest inelastic in the short run but interest elastic in the long run. Price elasticity of money demand is negligible in the short run but quite significant in the long run. Changes in the proportion of commercial bank assets placed in foreign money markets do not seem to affect demand for narrow money but their effect on the demand for broad money is both direct and significant.     

The stability of money demand in Germany and in the EMS: Impact of German unification

The Stability of Narrow Money Demand in Germany and Aggregate Money Demand in the EMS: Impact of German Unification. —This paper shows that the German monetary union not only had an impact on the stability of the narrow money demand in Germany but also on the stability of the aggregate demand for money in two larger European currency areas, consisting of three and seven EMS countries. However, the impact was only of a temporary nature. The empirical results show that the close link between real money, output, and the interest rate still exists. In a European Monetary Union, narrow money thus remains a potential candidate as an indicator and/or intermediate target for the European Central Bank.     

Money Demand and Economic Liberalization in a Small Open Economy—Trinidad and Tobago

Economic liberalization creates potential instability in money demand. The introduction of liberalization in the early 1990s coincided with instability in the long-run demand for broad money (M2). OLS estimates confirm the presence of a structural break in the M2 model. Monetary policy should be based on a narrow definition of money. Moreover, the demand for money function must take explicit account of the openness of the economy. The results have important implications for policymakers in other Caribbean countries that are contemplating economic liberalization.     

Money in the production function: A new Keynesian DSGE perspective

This article checks whether money is an omitted variable in the production process by proposing a microfounded New Keynesian Dynamic Stochastic General Equilibrium model. In this framework, real money balances enter the production function, and money demanded by households is differentiated from that demanded by firms. Using a Bayesian analysis, our model weakens the hypothesis that money is a factor of production. However, the demand of money by firms appears to have a significant impact on the economy, even if this demand has a low weight in the production process.     

The Demand For Money: A Structural Econometric Investigation

This study empirically investigates dynamic microfoundations for the conventional static money demand equation. An intertemporal substitution model with the addilog utility function yields a money demand relationship that closely approximates the double log specification. Results from previous empirical studies largely support the derived equation. Estimations with quarterly U.S. data support cointegration among real per capita M1 and consumption, and an after-tax long-term interest rate for the post-1980 period. Estimated short-run intertemporal interest rate elasticities of consumption vary from -0.26 to -0.93. Estimated long-run elasticities of substitution between consumption and money range from -0.26 to -0.41.     

Measuring misalignments in the Korean exchange rate

This paper measures to what extent the real effective exchange rate of the Korean won is misaligned from its equilibrium value by estimating the equilibrium value using the behavioral equilibrium exchange rate (BEER) approach. The economic fundamentals such as the terms of trade, the relative price of non-traded to traded goods, net foreign assets and real interest rate differentials are employed to assess the equilibrium exchange rate. Considering the drastic changes in Korea's trade pattern, the trade partner weights, which are used to compute the real effective exchange rate, are not fixed, but variable. The estimation results using the quarterly data from 1982Q1 to 2009Q4 indicate that the actual exchange rate of the Korean won was substantially overvalued for the period from 2005Q1 to 2007Q4, and substantially undervalued for the period from 2008Q2 to 2009Q3. The actual exchange rate deviates from the BEER and from the long-run equilibrium (or sustainable value) of the BEER by 32% and by 24% respectively in 2008Q4.     

The long-run determination of the real exchange rate. Evidence from an intertemporal modelling framework using the dollar-pound exchange rate.

This paper develops a model of optimal choice over an array of different assets, including domestic and foreign bonds, domestic and foreign equities and domestic and foreign real money balances to examine the determination of the real exchange rate in the long-run. The model is tested empirically using data from the UK and the USA. The results show that all the coefficients of the model are right signed and significant and consequently financial assets may play a significant role in the determination of the real exchange rate.     

Money growth volatility and the demand for money in Germany: Friedman’s volatility hypothesis revisited

Money Growth Volatility and the Demand for Money in Germany: Friedman’s Volatility Hypothesis Revisited. — Recently, the Bundesbank claimed that monetary targeting has become considerably more difficult by the increased volatility of short-term money growth. The present paper investigates the impact of German money growth volatility on income velocity and money demand in view of Friedman’s money growth volatility hypothesis. Granger-causality tests provide some evidence for a velocity/volatility linkage. However, the estimation of volatility-augmented money demand functions reveals that — in contrast to Friedman’s hypothesis — increased money growth volatility lowered the demand for money.     

An empirical analysis of China's equilibrium exchange rate: A co-integration approach

This paper estimates time specific values for China's long-run equilibrium exchange rate and develops measures of the direction and extent of misalignment based on a reduced-form real effective exchange rate (REER) model. An appropriately specified long-run equilibrium model is estimated and tested following Johansen and Juselius (1990) procedures, which is then used to construct an estimated time path for long-run equilibrium exchange rate values.Unit root tests indicated that each series can be considered as I(1) and that there was one cointegrating relationship linking the RMB series with its “fundamentals” – openness, money supply, productivity and government spending – with long-run elasticities of (0.41), (0.97), (0.51) and (0.75), respectively. The estimated error-correction model of REER determination showed that during China's latest exchange rate regime (from 2005:Q3) the RMB was undervalued by an average of 6.7 percent, which is modest compared to related studies.Estimation of the associated short-run error correction model shows that the error correction term has a statistically significant value of 0.85, implying that the actual real effective exchange rates would converge relatively quickly (just over one quarter, on average) towards their long-run equilibrium level in the absence of central bank intervention.     

China's money demand in a cointegrating vector error correction model

This paper estimates open-economy macroeconomic models of the Chinese economy allowing for the structural change caused by the 1992 reforms. Unrestricted vector autoregressions, VARs, and cointegrating vector error correction models, VECMs, are estimated on quarterly data for the early reform period 1980–1992, and the late reform period, 1993–2018. Two long-run cointegrating vectors are identified, which can be interpreted as a long-run, money demand function and a long-run IS type income equation driven by export demand. The 1992 reforms involved a move to a more market oriented system and a transformation of financial institutions and this seems to be responsible for a change in the direction of effect of interest rates in both the IS and LM relationships.     

Monetization and the behavior of velocity in Sweden, 1871–1913

The income velocity of money declined sharply in Sweden between the 1870's and the outbreak of World War I. This decline is explained by a monetization process. An account of this process is given focusing on (a) the growth of commercial banking, (b) changes in wage contracts and in labor markets, and (c) changes in exchange arrangements in the markets for goods. A number of proxy measures of the spreading use of money are presented and included in regressions on velocity. The influence of the monetization variables is compared to the effects of the standard explanatory variables in money demand studies, that is, of real income and interest rates. The econometric results support the view that monetization variables significantly contributed to the fall in velocity. These results question the luxury-good hypothesis of money, suggesting that the standard approach of including real income as an explanatory variable in money demand studies covering long spans of time runs the risk of ignoring important determinants of the secular behavior of velocity.