Open AccessModelling Short-run Money Demand for the US
Author(s) -
Marcus Scheiblecker
Publication year - 2017
Publication title -
applied economics and finance
Language(s) - English
Resource type - Journals
eISSN - 2332-7308
pISSN - 2332-7294
DOI - 10.11114/aef.v4i5.2575
Subject(s) - econometrics , economics , demand for money , steady state (chemistry) , short run , range (aeronautics) , representation (politics) , contrast (vision) , interest rate , computer science , macroeconomics , chemistry , materials science , artificial intelligence , politics , political science , law , composite material
There is a vast amount of empirical evidence concerning the cointegrating relationship between money demand, some kind of interest rate and income. In contrast to this, short-run dynamics are still opaque. In the existing literature, the return to steady state is modeled quite differently. The range goes from simple error correction models to non-linear approaches.We herewith propose a method for considering not only disequilibria between money demand and its steady state for the last period only, but also for such of the recent past in a parsimonious and economically meaningful way. As different from multicointegration, weights for cumulating steady-state deviations are geometrically decreasing, the more they are located in the past. This model possesses an ARMA (1,1) representation and leads to an ARMAX-model, if combined with a conventional error correction model. This approach is shown to track money demand short-run dynamics better and more parsimoniously than partial-adjustment models.