A Buffer Stock Model for the Personal Sector

Abstract

Recent studies on the personal sector demand for money by Davidson and Ireland (1989) and Hoggarth (1990) proceed down the cointegration route following Engle and Granger (1987). However, there is evidence to suggest that broad money may be a trend stationary process implying that cointegration may not be the appropriate modelling strategy for the demand for personal sector money.¹ Barr and Cuthbertson (1989a) find that their study of financial decisions of the personal sector warrants the inclusion of a time trend alongside the other variables, namely wealth, interest rate, the price level and real expenditure. The time trend starts in period 1983(4) to capture the effects of interest bearing chequing accounts and financial innovation in the sample. It is an interesting possibility that the time trend may be important because the dependent variable exhibits trend stationarity rather than difference stationarity, and the trend is significant because of this rather than due to the trend of financial innovation alone.