The stability of German money demand: Tests of the cointegration relation

The Stability of German Money Demand: Tests of the Cointegration Relation. — In this study, two money demand functions are specified in single equation error correction as well as triangular error correction form involving real M1 (M3), real GNP, a short-and a long-term interest rate. Using various tests, it is shown that there may be a cointegration relation even after the German Monetary Union (GMU) was established in 1990. But the long-run coefficients of GNP and the interest rate probably have a structural break in 1973, when the Bundesbank changed its monetary regime, and in 1990, when the GMU was formed. The tests support weak exogeneity of real GNP and the interest rate.     

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.     

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.     

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.     

Financial repression, money growth, and seignorage: The Polish experience

Financial Repression, Money Growth and Seignorage: The Polish Experience. — A small analytical framework is developed to analyze the relation between reserve requirements, base money growth and seignorage revenues. From the analysis, the authors can derive of steady-state seignorage revenues as a function of the rate of money growth and the intensity of financial repression. The framework is applied to the case of Poland that has undertaken a rapid transition to a market economy and implemented a substantial financial sector reform. The process of financial sector reform in Poland is discussed and estimates of the currency demand and deposit demand functions are undertaken to derive the seignorage Laffer curve.     

An econometric analysis of the main components of M3 in the Euro area

An Econometric Analysis of the Main Components of M3 in the Euro Area. — The main result is that the four components of M3 in the euro area can be explained in terms of a small set of explanatory variables (nominal GDP and interest rates) for the sample period January 1990 — September 1999 both in terms of levels and as shares of M3. Moreover, overall cointegration tests broadly support the hypothesis of long-run stability of the demand for the components of M3 and for M3 itself in nominal terms. Around the start of Stage Three of Monetary Union significant substitution between the components of M3 is detected. A refinement of the empirical analysis takes into account the correlation of the unexplained movements of the individual components using the SUR technique.     

EU-wide money and cross-border holdings

EU-Wide Money and Cross-Border Holdings. —The paper explores the economic properties of several measures of EU-wide money that include different definitions of cross-border holdings (CBHs). ‘Very broad’ aggregates are poorly linked with EU-wide income and price developments; in contrast, the demand for aggregates which is ‘focused on the European Union’ (which hinge on the inclusion of CBHs denominated in EU currencies and/or kept within the EU) is shown to be stable and predictable. Although aggregates extended to include CBHs do not yet outperform the traditional measure of broad money, they are likely to become an increasingly important tool for monetary analysis at the EU level.     

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.     

The demand for M3 and inflation forecasts: An empirical analysis for Switzerland

The Demand for M3 and Inflation Forecasts: An Empirical Analysis for Switzerland. — This paper argues that money should continue to play an important role in monetary policy even if a central bank pursues a strategy based on inflation forecasts. Within the context of an error correction model, the paper delivers empirical evidence that both the growth rate of the monetary aggregate M3 and the size of excess M3 incorporate useful information with regard to future inflation in Switzerland. This evidence strongly suggests that money should remain an important indicator for monetary policy.     

Aggregate price shocks and financial stability: the United Kingdom 1796-1999

This paper investigates aggregate price shocks on financial stability in the United Kingdom. We construct an annual index of UK financial conditions for 1790-1999 and use a dynamic probit model to estimate the effect of shocks on the index. We find evidence that price level shocks contributed significantly to financial instability during 1820-1931 and that inflation rate shocks contributed to instability during 1931-1999. While affecting the stability of the financial system, both the nature of aggregate price shocks and their impact depend on the existing monetary and financial regime.     

Money demand in China and time-varying cointegration

Many studies analyze the money demand using a (fixed coefficient) cointegrating regression model, which may not be appropriate to deal with the money demand of a transition economy like China. This paper investigates this issue using a time-varying cointegration approach based on the quarterly data from 1996 to 2009. We find some interesting results: (i) the estimates of the income elasticities are between 0.60 and 0.75, which are comparable with the previous studies; (ii) the estimated interest rate elasticity supports the argument that the overall effect of the interest rate on the money holding is weak although there are some mild evidences that it has been strengthened in recent years; (iii) the substitution effect of equity asset dominates the wealth effect, especially, during the bullish market period. Our result is robust to the alternative choices of the scale or opportunity cost variables and shows that omission of the stock prices in the money demand function would possibly yield a misspecification problem.     

The link between immigration and trade: Evidence from the United Kingdom

Immigration and Trade: Evidence from the United Kingdom. — This paper investigates the link between immigration and trade using recent UK data. Immigration from non-Commonwealth countries is shown to have a significant export-enhancing effect. By contrast, immigration from Commonwealth countries is found to have no substantial impact on exports. We conjecture that this could be because immigrants from the UK’s former colonies do not bring with them any new information that can help substantially reduce the transaction cost of trade between their home countries and the host nation. The study also reveals a pro-imports effect of immigration from the non-Commonwealth countries, whereas immigration from the Commonwealth appears to be reducing imports, perhaps reflecting trade-substituting activities by immigrants.     

Mechanical refrigeration, seasonality, and the hog-corn cycle in the United States: 1870-1940

This paper examines the role of mechanical refrigeration in seasonality and structural change in the U.S. hog-corn cycle, 1870-1940. This period covers an era in which the widespread adoption of mechanical refrigeration greatly affected the ability to store and transport perishable commodities. These developments in turn altered the seasonal production and price structure for many commodities, including pork. We use a new class of time series models, time-varying smooth transition autoregressions (TV-STARs), to document both the structural change and the nonlinear features observed in seasonal patterns for the U.S. hog-corn price relationship during the late nineteenth and early twentieth centuries.     

Mean Reversion in the Real Interest Rate and the Effects of Calculating Expected Inflation

We investigate the measured persistence in the real interest rate using a variety of methods to annualize inflation and calculate the real rate. Results from a battery of conventional unit root tests yield conflicting conclusions for the various real rates, adding to an existing confusion regarding mean reversion. Both long memory and exponential smooth‐transition autoregressive models (ESTAR) nonlinearity are considered as possible alternatives, and in contrast to the unit root test results, we find highly robust evidence against the unit root null. Based on the empirical results, Monte Carlo analysis is performed to study the disparate results obtained using fractional integration and unit root tests.     

Inflation and Structural Change in 50 Developing Countries

This study provides evidence on whether the inflation rate is stationary or nonstationary using quarterly inflation rate data from 50 developing countries. As Johansen [Johansen, Soren. “Testing Weak Exogeneity and Order of Cointegration in UK Money Demand Data,” Journal of Policy Modeling, 14, 3, June 1992, pp. 313–334] put it, “some time series such as the log of prices (P), have the property that even the inflation rate ΔP is nonstationary, whereas the second difference Δ²P is stationarity.” Results from fractional integration analyses provide evidence of long memory and confirm that the nonstationarity threshold of d³0.5 is satisfied in the majority of the cases. Results from recursive analyses indicate that, despite the finding that structural changes influence the behavior of the estimated integration parameters, evidence of long memory and nonstationarity can be found in each subsample as well as the full sample data.     

Parameter instability, superexogeneity, and the monetary model of the exchange rate

Parameter Instability, Superexogeneity and the Monetary Model of the Exchange Rate. — This paper argues that failure to test for parameter time invariance yields misleading results. Time heterogeneity other than unit roots will make the parameters of the unrestricted system unstable and statistical inference invalid. However, if the instability stems from a particular subset of variables (superexogenous with respect to the parameters of interest), conditioning on them results in a partial model with stable parameters, and standard inferential procedures can then be used. We apply this methodology to test the monetary model of the exchange rate and find that both system and single-equation estimates support it in the case of yen-dollar exchange rate.     

A cross-country comparison of the demand for labour in Europe

A Cross-Country Comparison of the Demand for Labour in Europe.-This paper investigates structural differences in the demand for labour in France, Germany, and the UK. It finds substantial differences in the sensitivity of the demand for labour to international product demand and factor prices in all three countries. In particular, it reacts to domestic factor prices in Germany but international cost competitiveness in France and the UK; it depends upon European-wide product demand in France and Germany and a wider measure of product demand in the UK. The authors attribute these differences to product market conditions and institutional factors rather than to differences in the production technology.     

The demand for money in the Netherlands revisited

Summary This article presents an analysis of demand for money in The Netherlands, both at the aggregate level and the sectoral level. Special attention is devoted to the distinction between short and long run demand. Deviations of the long-run relationships are modelled by means of the error correction mechanism. The elasticities for aggregate demand are consistent with the findings for the money demand by the household and business sectors and correspond reasonably well with those derived from other studies. The estimated equations describe the rise in theM1- andM2-ratio in the 1980s in a satisfactory way, although forM2 from 1987 onwards there is a discrepancy between actual and fitted values. The disaggregated analysis shows that the behaviour of the business sector seems to be responsible for this.The authors are indebted to Professor S.K. Kuipers for his comments on an earlier draft.