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Investigating stability and linearity of a German M1 money demand function
Author(s) -
Lütkepohl Helmut,
Teräsvirta Timo,
Wolters Jürgen
Publication year - 1999
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/(sici)1099-1255(199909/10)14:5<511::aid-jae529>3.0.co;2-c
Subject(s) - linearity , unification , economics , econometrics , stability (learning theory) , german , demand for money , demand curve , function (biology) , instability , linear regression , mathematics , mathematical economics , keynesian economics , statistics , monetary policy , computer science , microeconomics , physics , geography , archaeology , quantum mechanics , machine learning , evolutionary biology , biology , programming language , mechanics
Starting from a linear error correction model (ECM) the stability and linearity of a German M1 money demand function are investigated, applying smooth transition regression techniques. Using seasonally unadjusted quarterly data from 1961(1) to 1990(2) it is found that the money demand equation considered is both linear and stable. After extending the sampling period until 1995(4) a clear structural instability due to the monetary unification on 1 July 1990 is found and subsequently modelled. A non‐linear specification for the extended period is presented and discussed. Copyright © 1999 John Wiley & Sons, Ltd.