Seasonal cointegration and the stability of the demand for money

Raimundo Soto and Matias Tapia

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: Studies on money demand in both developed and developing countries coincide in reporting systematic over predictions of monetary aggregates, non-robust estimated parameters and out-of-sample forecast variances that are too large to guide monetary policy. Several explanations have been given for these failures, including dynamic misspecification, omitted variables such as financial innovations, and non observed components. This paper explores an alternative, simpler way to approach the instability of money demand using seasonal-cointegration techniques. Using Chilean data we find that seasonal cointegrating vectors exist and, when omitted from the estimation, account for a substantial fraction of the observed instability in money demand functions. Because seasonal cointegrating vectors act as additional long-run restrictions, they can substantially reduce the variance of forecast errors. The estimated demand for money in Chile is remarkably stable in spite of the profound structural and financial reforms carried out throughout the 1977-2000 period, parameters are robust and similar to those suggested by economic theories.

Date: 2001-07
New Economics Papers: this item is included in nep-ets and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.bcentral.cl/documents/33528/133326/DTBC_103.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:103

Access Statistics for this paper

More papers in Working Papers Central Bank of Chile from Central Bank of Chile Contact information at EDIRC.
Bibliographic data for series maintained by Alvaro Castillo ().