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Nonlinearities in the dynamics of the euro area demand for M1

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Author Info
Alessandro Calza () (European Central Bank)
Andrea Zaghini () (Bank of Italy, Economics, Research and International Relations Area)

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Abstract

The paper finds evidence of non-linearities in the dynamics of the euro-area demand for the narrow aggregate M1. A long-run money demand relationship is first estimated over a sample period covering the last three decades. While the parameters of the relationship are jointly stable, there are indications of non-linearity in the residuals of the error-correction model. This non-linearity is explicitly modelled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of non-linearities in the dynamics of adjustment to equilibrium stemming from "buffer stock" and "target-threshold" models and with analogous empirical evidence for European countries and the US.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 690.

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Date of creation: Sep 2008
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Handle: RePEc:bdi:wptemi:td_690_08

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Related research
Keywords: Euro area; cointegration; non-linear error-correction; demand for money;

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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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