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Modelling and forecasting money demand: divide and conquer

Cesar Carrera () and Jairo Flores Audante ()

No 2017-91, Working Papers from Peruvian Economic Association

Abstract: The literature on money demand suggests several specification forms of empirical functions that better describe observed data on money in circulation. In a first stage, we select the best long-run model specification for a money demand function at the aggregate level based on forecast performance. On a second stage we divide the money in circulation by denomination and argue that determinants of a low-level denomination is different than those of a high-level. We then estimate the best model specification for each denomination and aggregate each forecast in order to have an aggregate proyection. We finally compare forecasts between these strategies. Our results indicate that the bottom-up approach has a better performance than the traditional view of directly forecasting the aggregate.

Keywords: Money demand; bottom-up; co-integration; forecast (search for similar items in EconPapers)
JEL-codes: C16 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mon
Date: 2017-04
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