The Long Run Demand for Broad Money in Australia Subject to Regime Shifts

Bruce Felmingham and Qing Zhang

Australian Economic Papers, 2001, vol. 40, issue 2, 146-155

Abstract: The goal is to determine if there is a stable Broad Money demand relationship for Australia. Previous studies have not reached a consensus on this important issue, partly because the time series techniques used do not accommodate structural breaks. A standard multivariate cointegration analysis is conducted on monthly data over the period 1976(3) to 1998(4). It reveals some evidence for the presence of cointegration since one cointegrating vector is found. This involves broad money, the spread between interest on broad money and on non‐money assets and real GDP. The evidence of cointegration is again present when a structural break is found in the relationship using Gregory and Hansen (GH) methodology. This occurs in 1991 coinciding with a deep recession and policy induced, interest rate reductions. The income elasticity of demand exceeds one, reacts positively to the interest spread and negatively to inflation.

Date: 2001
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