Specification and Goldfeld money demand function

Despite intensive investigation of the temporal stability of the Goldfield formulation of the money demand function, a clear consensus on its stability has yet to emerge. This paper builds a statistical case supporting the first difference of log-levels specification, as opposed to the more commonly used log-levels specification, of the Goldfeld equation and then examines the stability of both specifications. Formal stability tests proposed by Cooley and Prescott, Farley and Hinich, and Brown, Durbin, and Evans are employed; the out-of-sample predictive performance is examined as well. These tests strongly support the first difference specification over thelog-levels specification.