Revisiting the US money demand function: an application of the Lagrange multiplier structural break unit root test and the bounds test for a long-run relationship

Paresh Narayan ()

Applied Economics, 2008, vol. 40, issue 7, 897-904

Abstract: In this article, we examine the issue of a levels relationship and stability of the US money demand function over the period 1959:01 to 2004:02. We use the Lagrange multiplier structural break unit root test and the bounds testing approach to a long-run relationship in levels of the variables, namely real money demand, nominal interest rate and real income. We find greater evidence for a long-run relationship in levels and stability of the US money demand function when we use M2 as a proxy for money demand. However, we find little evidence for a long-run relationship between M1 and M2 with their determinants for the recent period, spanning the last decade or so.

Date: 2008
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DOI: 10.1080/00036840600749813

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