Balanced Growth, the Demand for Money, and Monetary Aggregation
In this chapter, building on a previous empirical study by King, Plosser, Stock, and Watson (1991), we apply the Johansen (1988) maximum likelihood approach for estimating long-run steady-state relations in multivariate vector autoregressive models, to test the implications of neoclassical stochastic growth theory and traditional money demand theory. As we argued in Chapter 10, the Johansen approach is superior to the Engle and Granger (1987) methodology, because it fully captures the underlying time series properties of the data, provides estimates of all the cointegrating relations among a given set of variables, offers a set of test statistics for the number of cointegrating vectors, and allows direct hypothesis tests on the elements of the cointegrating vectors.
KeywordsUnit Root Money Demand Balance Growth Monetary Aggregate Cointegrating Vector
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