Non-linear dynamics in the euro area demand for M1

Alessandro Calza and Andrea Zaghini

No 592, Working Paper Series from European Central Bank

Abstract: This paper investigates possible non-linearities in the dynamics of the euro area demand for the narrow aggregate M1. A long-run money demand relationship is firstly estimated over a sample period covering the last three decades. While the parameters of the relationship are jointly stable, there are indications of non-linearity in the residuals of the error-correction model. This non-linearity is explicitly modelled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions stemming from "buffer stock" and "target-threshold" models and with analogous empirical evidence for European countries and the US. JEL Classification: E41, C22

Keywords: cointegration; demand for money.; euro area; non-linear error correction (search for similar items in EconPapers)
Date: 2006-02
Note: 338639
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2006592

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