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Nonlinearities in the dynamics of the euro area demand for M1

Alessandro Calza () and Andrea Zaghini
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Alessandro Calza: European Central Bank

No 690, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: Euro area; cointegration; non-linear error-correction; demand for money (search for similar items in EconPapers)
JEL-codes: C22 E41 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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http://www.bancaditalia.it/pubblicazioni/temi-disc ... 0690/en_tema_690.pdf (application/pdf)

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Journal Article: NONLINEARITIES IN THE DYNAMICS OF THE EURO AREA DEMAND FOR M1 (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_690_08

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