Abstract
The stability of the demand for money in Germany has been tested in numerous studies. In cross-country studies, money demand functions for Germany pass the stability tests by a large majority, whereas most of the single-country studies have produced evidence of instability. Thus instability seems to be a matter of focus. Among other factors, it can be attributed to the choice of aggregate and to parameter restrictions in partial-adjustment models. In order to avoid such biases, this paper provides an application of cointegration and error-correction modelling to the demand for German M3 (1963Q1–1990Q2). A unique cointegrating vector is found, from which the error-correction term for the dynamic specification is derived. Generalto-specific modelling yields an error-correction model of German M3 demand which is satisfactory with regard to the usual criteria. Further tests confirm model and parameter stability and demonstrate that a stable demand function can be derived with a fairly conventional specification and without resort to sample splits in the critical (regime shift) period around 1974.
We are grateful to Philip Arestis, Harald Hagemann and Peter Howells for helpful comments. We presume that they do not wish to be blamed for any remaining errors. Financial support from the British Council and the DAAD (Deutscher Akademischer Austauschdienst) is gratefully acknowledged.
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Mariscal, I.BF., Trautwein, HM. (1994). A Cointegration and Error Correction Model of the Demand for Money (M3) in Germany. In: Bol, G., Nakhaeizadeh, G., Vollmer, KH. (eds) Finanzmarktanwendungen neuronaler Netze und ökonometrischer Verfahren. Wirtschaftswissenschaftliche Beiträge, vol 93. Physica-Verlag HD. https://doi.org/10.1007/978-3-642-46948-0_5
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