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(When) Should cointegrating regressions be detrended? The case of a German money demand function

Author

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  • Uwe Hassler

    (Free University of Berlin, Institute of Statistics and Econometrics, Boltzmannstrasse 20, D-14195 Berlin, Germany)

Abstract

If an economic relationship is superimposed by a linear time trend, the regression without detrending is misspecified. The estimators of such a regression do not converge to the true parameter values. First, the asymptotic limit arising from such misspecified regressions is characterized. Second, we observe with data before 1975 a significant time trend but no cointegrating relation between real money (M1), income and a long-term interest rate. The price level as a significant omitted variable is considered as an economic explanation for this feature. We find a price elasiticity larger than one. Third, with data after the breakdown of Bretton Woods (and the beginning of monetary targeting by the Bundesbank), real money, income and the interest rate alone are cointegrated. The long-run estimates seem to be fairly stable with data after the German union provided a step dummy accounts for a break in the mean.

Suggested Citation

  • Uwe Hassler, 1999. "(When) Should cointegrating regressions be detrended? The case of a German money demand function," Empirical Economics, Springer, vol. 24(1), pages 155-172.
    • Handle: RePEc:spr:empeco:v:24:y:1999:i:1:p:155-172
    Note: received: November 1996/final version received: June 1998
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    Citations

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    Cited by:

    1. Uwe Hassler & Jürgen Wolters, 2006. "Autoregressive distributed lag models and cointegration," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 90(1), pages 59-74, March.
    2. Uwe Hassler, 2000. "Cointegration Testing in Single Error‐Correction Equations in the Presence of Linear Time Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(5), pages 621-632, December.
    3. Ioannis Ganoulis & Massimo Giuliodori, 2011. "Financial liberalization and house price dynamics in Europe," Applied Economics, Taylor & Francis Journals, vol. 43(21), pages 2671-2688.
    4. Hassler Uwe, 2001. "Wealth and Consumption. A Multicointegrated Model for the Unified Germany / Vermögen und Konsum. Ein multikointegriertes Modell für das vereinigte Deutschland," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 221(1), pages 32-44, February.

    More about this item

    Keywords

    Linear trends; stochastic cointegration; misspecified regression; stable real money demand;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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