Money demand in an open-economy shopping-time model: an out-of-sample-prediction application to Canada

This paper contributes to the existing money demand literature by developing a shopping-time model in an open economy framework. Based on this microfoundations-of-money model, Canadian quarterly time series data for the period 1971:1–1997:2 are used to evaluate the out-of-sample prediction performance of the model. The results show that an error-correction representation of the model performs significantly better than several unrestricted and traditional open- and closed-economy models in the out-of-sample prediction of Canadian real M1 demand.Keywords: Money demand; Open-economy shopping-time model; Out-of-sample predictionJEL classification: E41; F41.