Money Demand in the euro area, the US and the UK:Assessing the Role of Nonlinearity

Fredj Jawadi and Ricardo Sousa

No 22/2012, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: This paper estimates money demand equations for the euro area, the US and the UK using three different econometric methodologies: (i) a linear model based on a dynamic ordinary least squares (DOLS); (ii) a nonlinear technique based on a quantile regression framework; and (iii) a nonlinear model relying on a smooth-transition regression. The linear model shows that the elasticity of money demand with respect to income is positive and large in magnitude, while the elasticity of money demand with respect to the interest rate is negative and generally small. The quantile regression technique highlights that: (i) the income and the interest rate semi-elasticities are significantly different from the OLS estimates at the tails of the distribution of real money holdings; and (ii) the sensitivity of money demand with respect to inflation tends to be larger when real money holdings are extremely low. Finally, the smooth transition model provides two interesting findings. On the one hand, they capture reasonably well the dynamics of the money demand function. On the other hand, they show that the elasticity of money demand with respect to inflation rate, interest rate and GDP varies not only in accordance with the regime considered, but also across the countries under consideration.

Keywords: money demand; dynamic OLS; smooth transition; quantile regression. (search for similar items in EconPapers)
JEL-codes: C2 D12 E21 E44 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-eec and nep-mon
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Journal Article: Money demand in the euro area, the US and the UK: Assessing the role of nonlinearity (2013)
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