Varying Parameter Estimation of the Interest Elasticity of M1 Demand, 1974:1-86:1

Myung Suk Kang
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Myung Suk Kang: Dongguk University

Korean Economic Review, 1992, vol. 8, 143-162

Abstract: In this paper an analysis of conflicting results from Miller's (1986) and Mehra's (1986) study is that Miller did not properly consider an effect of gradual deregulation of interest-bearing NO Ws on the interest coefficient of M1 demand by omitting interest dummies for the subperiod of financial innovation and deregulation. For the case of sequential and systematic parameter variation due to this form of misspecification, this study proposes the varying parameter regression model by Kalman for the period 1974: 1-86 : 1, allowing the parameters to vary over time. Using Garbade's method along with Chavas's method in determining the process noise variance, our empirical results firmly support the above analysis. It is suggested that over the period of the innovation and deregulation, constant estimation technique seriously biases the estimate of the interest elasticity of MI demand.

Date: 1992
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