Testing linearity in a cointegrating STR model for the money demand function: International evidence from G-7 countries

Chien-Chiang Lee (), Pei-Fen Chen and Chun-Ping Chang

Mathematics and Computers in Simulation (MATCOM), 2007, vol. 76, issue 4, 293-302

Abstract: The motivation behind this paper is to re-investigate the stability of the long-run money demand function (MDF) in a non-linear cointegrating framework for G-7 countries. Previous studies on non-linearity in the MDF are only related to the short-run dynamics and assume that long-run cointegrating relations are linear, which according to economic theory need not be the case. Thus, we really need to focus on the variables in the long-run MDF and their determinants through the adoption of a cointegrating smooth transition regression (CSTR) test developed by [I. Choi, P. Saikkonen, Testing linearity in cointegrating smooth transition regressions, Economet. J. 7 (2004) 341–365]. The reason is due to this model being more general than the traditional STR model in that it may contain several transition functions and has more than a single transition variable. Our evidence demonstrates the existence of a non-linear cointegrating relationship, and as such several transition variables should be of more concern under the non-linear hypothesis. Overall, we propose more possibilities that will bring about the unstable phenomenon of the long-run MDF.

Keywords: Smooth transition regression; Non-linear cointegration; Money demand function; G-7 countries (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:76:y:2007:i:4:p:293-302

DOI: 10.1016/j.matcom.2006.12.012

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