Working Paper: CEPR ID: DP3249
Authors: Lucio Sarno; Mark P. Taylor; David Peel
Abstract: Several theoretical models of money demand imply non-linear functional forms for the aggregate demand for money characterized by smooth adjustment towards long-run equilibrium. In this Paper, we propose a non-linear equilibrium correction model of US money demand, which is shown to be stable over the sample period from 1869 to 1997.
Keywords: Adjustment Costs; Demand for Money; Equilibrium Correction; Nonlinear Dynamics
JEL Codes: E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nonlinear equilibrium correction model (C62) | Adjustment of money demand towards long-run equilibrium (E41) |
| Size of deviation from equilibrium (D50) | Speed of adjustment of money balances (E41) |
| Failure to account for nonlinearities (C22) | Challenges in obtaining stable money demand equations (E41) |