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Revisiting the demand for money function: evidence from the random coefficients approach
Authors:Chien-Chiang Lee  An-Hsing Chang
Institution:1. Department of Finance , National Sun Yat-sen University , No. 70, Lienhai Rd., Kaohsiung , Taiwan cclee@cm.nsysu.edu.tw;3. Department of Money and Banking , National Chengchi University , No. 64, Sec. 2, ZhiNan Rd., Wenshan District , Taipei City , Taiwan
Abstract:This article employs second-generation random coefficient (RC) modeling to investigate the time-varying behavior and the predictability of the money demand function in Taiwan over the period from 1982Q1 to 2006Q4. The RC procedure deals with some of the limitations of previous studies, such as unknown functional forms, omitted variables, measurement errors, additive error terms, and the correlations between explanatory variables and their coefficients. Our main findings are as follows. First, the empirical results indicate that the values of the elasticities in the RC estimation are significantly different from those in other studies, because of the use of coefficient drivers. Second, by observing the time-varying behavior of the coefficients, we find some specific points in our time profile of coefficients; that is, we can make an association with real events occurring in Taiwan, such as the financial liberalization after 1989 and the Asian financial crisis of 1997–1998. Finally, we compare the predicted values via the time intervals and different specifications and find that we should adapt different specifications of the RC model to estimate each interval.
Keywords:Money demand  Random coefficient estimation  Time-varying  Predictability
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