Error-Correction Based Panel Estimates of the Demand for Money of Selected Asian Countries with the Extreme Bounds Analysis

Rao, B. Bhaskara and Kumar, Saten (2010): Error-Correction Based Panel Estimates of the Demand for Money of Selected Asian Countries with the Extreme Bounds Analysis.

Abstract

This paper uses the extreme bounds analysis (EBA) of Leamer (1983 &1985) to analyze the robust determinants of the demand for money in a panel of 17 Asian countries for the period 1970 to 2009. These robust determinants are found to be unit root variables. Therefore, cointegration between these variables is tested with a recent time series panel method developed by Westerlund (2007). This method uses the error-correction formulation and has more power against the null of no cointegration. The results show that there is a well-defined long-run demand for money. Using the lagged error correction term from the estimated cointegrating equation, the short-run dynamic relationships are estimated. This paper, thus, suggests some useful guidelines to estimate other relationships with panel data.

• Item Type: MPRA Paper
• Language: English
• Keywords: Demand for money; Extreme bounds analysis; Panel ECM; Structural breaks
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

References

Arrau, P., De Gregorio, J., Reinhart, C.M. and Wickham, P. (1995) ‘The demand for money in developing countries: assessing the role of financial innovation,’ Journal of Development Economics, 46, 317-340.

Artis, M. J., Bladen-Hovell, R. C. and Zhang,W. (1993) ‘A European money demand function.’ in: P. R. Masson and M. P. Taylor (eds.), Policy issues in the operation of currency unions. Cambridge: Cambridge University Press, pp. 240-263.

Baba, Y., Hendry, D.F. and Starr, R.M. (1992) ‘The demand for M1 in the U.S.A., 1960–1988,’ Review of Economic Studies, 59, 25–61.

Bahmani-Oskooee, M. and Economidou, C. (2005) ‘How stable is the demand for money in Greece,’ International Economic Journal, 19, 461-472.

Bahmani-Oskooee, M. and Rehman, H., (2005) ‘Stability of the money demand function in Asian developing countries,’ Applied Economics, 37, 773-792.

Bahmani-Oskooee, M. and Shabsigh, G. (1996) ‘The demand for money in Japan: evidence from cointegration analysis, Japan and the World Economy, 8, 1-10.

Ball, L. (2001) ‘Another look at long-run money demand,’ Journal of Monetary Economics, 47, 31–44.

Barnett, W., Fisher, D., and Serletis, A. (1992) ‘Consumer theory and the demand for money,’ Journal of Economic Literature, 30, 2086–2119.

Barro, R. J. (1996) ‘Determinants of Economic Growth: A Cross-Country Empirical Study,’ NBER WP 5698, National Bureau of Economic Research, Cambridge, MA.

Breitung, J. (2000) ‘The local power of some unit root tests for panel data,’ in Baltagi, B. (ed.), Advances in Econometrics: Non-stationary panels, panel cointegration, and dynamic panels, JAI Press, Amsterdam, pp. 161-178.

Breitung, J. (2006) ‘A parametric approach to the estimation of cointegration vectors in panel data,’ Econometric Reviews, 24,151–173.

Choi, D. and Oxley, L. (2004) ‘Modelling the demand for money in New Zealand,’ Mathematics and Computers in Simulation, 64, 185-191.

Drake, L. and Chrystal, K.A. (1994) ‘Company-sector money demand: new evidence on the existence of a stable long-run relationship for the United Kingdom,’ Journal of Money, Credit, and Banking, 26, 479–494.

Duca, J.V. and VanHoose, D.D. (2004) ‘Recent developments in understanding the demand for money,’ Journal of Economics and Business, 56, 247-272.

Fielding, D. (1994) ‘Money demand in four African countries,’ Journal of Economics Studies, 21, 17-51.

Friedman, M. (1956) ‘The quantity theory of money- a restatement’ in studies in the quantity theory of money, M. Friedman, ed.,’ Chicago, IL: University of Chicago Press.

Ghartey, E.E. (1998) ‘Monetary dynamics in Ghana: evidence from cointegration, error correction modelling, and exogeneity,’ Journal of Development Economics, 57, 473-86.

Gilbert, C. L. (1986) ‘Professor Hendry's Econometric Methodology,’ Oxford Bulletin of Economics and Statistics, 48, 283-307.

Goldfeld, S. M. (1973) ‘The demand for money revisited,’ Brookings Paper on Economic Activity, 4, 577-638.

Hadri, K. (2000) ‘Testing for stationarity in heterogeneous panel data,’ Econometric Journal, 3, 148-161.

Hafer, R. W. and Kutan, A. M. (1993) ‘Price deflation, money demand, and further: evidence on money, output, and prices in China,’ Journal of Comparative Economics, 17, 701–9.

Hafer, R. W. and Kutan, A. M. (1994) ‘Economic reforms and long-run money demand in China: implications for monetary policy,’ Southern Economic Journal, 60, 936–45.

Hansen, B. E. (1992) ‘Tests and parameter instability in regressions with I(I) processes,’ Journal of Business and Economic Statistics, 10, 321-335.

Haug, A. A. and Lucas, R.F. (1996) ‘Long-term money demand in Canada: in search of stability,’ The Review of Economics and Statistics, 78, 345–48.

Hendry, D. F. (1995) ‘Dynamic Econometrics,’ Oxford: Oxford University Press.

Hendry, D.F. and Krolzig, H.M. (2001) ‘Automatic Econometric Model Selection Using PcGets,’ London: Timberlake Consultants Ltd.

Hoffman, D., Rasche, R. H. and Tieslau, M. A. (1995) ‘The stability of long-run money demand in five industrial countries,’ Journal of Monetary Economics, 35, 317–39.

Im, K.S., M.H. Pesaran and Y. Shin (2003) ‘Testing for unit roots in heterogeneous panels,’ Journal of Econometrics, 115, 53-74.

Juselius, K. (1998) ‘A structured VAR for Denmark under changing monetary regimes,’ Journal of Business and Economic Statistics, 16, 400-411.

Kumar, S. and Rao, B. B. (2011) ‘Time series approach to the Feldstein-Horioka puzzle with panel data from the OECD countries’, forthcoming, The World Economy.

Laidler, D. (1993a) ‘The Demand for Money, 4th ed.,’ New York: Harper Collins College Publishers.

Laidler, D.E.W. (1993b) ‘The demand for money: theories, evidence and problems,’ HarperColins College, New York.

Laidler, D. E. W. (1977) ‘The demand for money: theories and evidence 2nd edition,’ New York: Harper and Row.

Laidler, D. E. W. (1969) ‘The demand for money: theories and evidence,’ New York: Harper and Row.

Leamer, E. E. (1983) ‘Let’s Take the Con Out of Econometrics,’ American Economic Review 73, 31–43.

Leamer, E. E. (1985) ‘Sensitivity Analyses Would Help,’ American Economic Review 75, 308–13.

Levin, A., C.F. Lin and C. Chu (2002) ‘Unit root tests in panel data: asymptotic and finite sample properties,’ Journal of Econometrics, 108, 1-24.

Levine, R. and D. Renelt. (1992) ‘A Sensitivity Analysis of Cross Country Growth Regressions,’ American Economic Review, 82, 942-963.

Lutkepohl, H. and Wolters, J. (1998) ‘A money demand system for German M3,’ Empirical Economics, 23, 371-386.

Mankiw, N.G., D. Romer and D. Weil. (1992) ‘A Contribution to the Empirics of Economic Growth,’ Quarterly Journal of Economics, 107, 407-437.

Mark, N.C. and Sul, D., (2003) ‘Cointegration vector estimation by Panel DOLS and long-run money demand,’ Oxford Bulletin of Economics and Statistics, 65, 655-680.

Monticelli, C. and Strauss-Kahn, M-O. (1993) ‘European integration and the demand for broad money,’ The Manchester School, 61, 345-366.

Murthy, N. R. V. (2007) ‘Panel cointegration analysis: An empirical example,’ in Rao, B. B. (ed.) Cointegration for the Applied Economist”, Basingstoke, 2007: Palgrave, 2nd edition, pp.222-244.

Newey, W. K., and K. D. West. (1994) ‘Automatic lag selection in covariance matrix Estimation,’ Review of Economic Studies, 61, 631–653.

Nielsen, H., Tullio, G. and Wolters, J. (2004) ‘Currency substitution and the stability of the Italian demand for money before the entry into the monetary union, 1972–1998,’ International Economics and Economic Policy, 1, 73-85.

Orden, D. and Fisher, L.A. (1993) ‘Financial deregulation and the dynamics of money, prices, and output in New Zealand and Australia,’ Journal of Money, Credit, and Banking, 25, 273–92.

Pedroni, P. (2000) ‘Fully-Modified OLS for heterogeneous cointegrated Panels,’ Advances in Econometrics, 15, 93-130.

Pedroni, P. (2004) ‘Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis,’ Econometric Theory, 3, 579–625.

Rao, B.B. and Kumar, S. (2009) ‘A panel data approach to the demand for money and the effects of financial reforms in the Asian countries,’ Economic Modeling, 26, 1012-1017.

Sala-i-Martin, X. (1997a) ‘I Just Ran Four Millions Regressions,’ Mimeo, Columbia University.

Sala-i-Martin, X. (1997b) ‘I Just Ran Two Millions Regressions,’ American Economic Review 87, 2, 178-183.

Serletis, A. (2001) ‘The demand for money- theoretical and empirical approaches,’ 1st Edition, Massachusetts: Kluwer Academic Publishers.

Westerlund, J. (2007) ‘Testing for error correction in panel data,’ Oxford Bulletin of Economics and Statistics, 69, 709–748.

Westerlund, J. (2006) ‘Testing for panel cointegration with multiple structural breaks,’Oxford Bulletin of Economics and Statistics, 68, 101-32.