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Adapting to instability in money demand: forecasting money growth with a time-varying parameter model

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  • Timothy Cogley

Abstract

Conventional money demand models appear to be unstable, and this complicates the problem of conducting monetary policy. One way to deal with parameter instability is to learn how to adapt quickly when parameters shift. This paper applies a time-varying-parameter estimator to conventional money demand models and evaluates its usefulness as a forecasting tool. In relative terms, the time-varying-parameter estimator improves significantly on ordinary least squares. In absolute terms, we continue to have difficulty tracking money demand through turbulent periods.

Suggested Citation

  • Timothy Cogley, 1993. "Adapting to instability in money demand: forecasting money growth with a time-varying parameter model," Economic Review, Federal Reserve Bank of San Francisco, pages 35-41.
    • Handle: RePEc:fip:fedfer:y:1993:p:35-41:n:3
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    References listed on IDEAS

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    4. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
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    6. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-844, December.
    7. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    8. Duca, John V., 1995. "Should bond funds be added to M2?," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 131-152, April.
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    Cited by:

    1. Jan-Erik Antipin & Farid Jimmy Boumediene & Pär Österholm, 2014. "Forecasting Inflation Using Constant Gain Least Squares," Australian Economic Papers, Wiley Blackwell, vol. 53(1-2), pages 2-15, June.
    2. Qureshi, Irfan, 2016. "Monetarism, Indeterminacy and the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1123, University of Warwick, Department of Economics.
    3. Vilasuso, Jon, 1999. "The Liquidity Effect and the Operating Procedure of the Federal Reserve," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 443-461, July.

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