Non-Linear Dynamics in the Euro Area Demand for M1

32 Pages Posted: 23 Mar 2006

Date Written: February 2006

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.

Keywords: Euro area, cointegration, non-linear error correction, demand for money

JEL Classification: E41, C22

Suggested Citation

Calza, Alessandro and Zaghini, Andrea, Non-Linear Dynamics in the Euro Area Demand for M1 (February 2006). ECB Working Paper No. 592, Available at SSRN: https://ssrn.com/abstract=885323 or http://dx.doi.org/10.2139/ssrn.885323

Alessandro Calza (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Andrea Zaghini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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