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A CLOSER LOOK AT LONG‐RUN U.S. MONEY DEMAND: LINEAR OR NONLINEAR ERROR‐CORRECTION WITH M0, M1, OR M2?
Author(s) -
HAUG ALFRED A.,
TAM JULIE
Publication year - 2007
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2006.00007.x
Subject(s) - economics , econometrics , error correction model , interest rate , income elasticity of demand , elasticity (physics) , carry (investment) , error detection and correction , demand for money , linearity , macroeconomics , mathematics , cointegration , engineering , materials science , algorithm , electrical engineering , composite material
We study annual U.S. data from 1869 or 1900 to 1999. We find evidence for a well‐specified and stable model of money demand with data from 1946 to 1999. We carry out diagnostic and stability tests, including linearity tests. A linear error‐correction model with the monetary base performs better than a model with M1. A specification with M2 is not supported. We use real gross national product as the scale variable and a short‐term interest rate as the opportunity cost measure. We estimate an income elasticity of 0.86 and an interest rate elasticity of −0.44 for the monetary base . ( JEL E41)