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NONLINEARITIES IN THE DYNAMICS OF THE EURO AREA DEMAND FOR M1

Published online by Cambridge University Press:  01 February 2009

Alessandro Calza  and
Andrea Zaghini
Alessandro Calza
Affiliation:
European Central Bank
Andrea Zaghini*
Affiliation:
Banca d'Italia
*
Address correspondence to: Andrea Zaghini, Banca d'Italia, Servizio Studi, Via Nazionale 91, 00184 Rome, Italy; e-mail: andrea.zaghini@bancaditalia.it.
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Abstract

This paper finds evidence of nonlinearities 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 past three decades. Although the parameters of the relationship are jointly stable, there are indications of nonlinearity in the residuals of the error-correction model. This nonlinearity is explicitly modeled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of nonlinearities 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 United States.

Keywords

Euro AreaCointegrationNonlinear Error-CorrectionMoney Demand
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 1 , February 2009 , pp. 1 - 19
Copyright
Copyright © Cambridge University Press 2008

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