Money Demand and Inflation: A Cointegration Analysis for Canada

Lubello, Federico (2011): Money Demand and Inflation: A Cointegration Analysis for Canada.

Abstract

The aim of this paper is to investigate the presence of long-run equilibrium relationships among variables that explain money demand in Canada during the period 1983–2011. To this end, I set up a vector-error correction model with an appropriate lag order and test for cointegration by means of the Bartlett corrected trace test. I estimate the long-run money demand parameters by means of the maximum likelihood method of Johansen, comparing an unconstrained benchmark model against other constrained model. I find the latter to not be better than the benchmark one. Finally, I perform sensitivity analysis and check the stability of the resulting cointegration relationships.

• Item Type: MPRA Paper
• Language: English
• Keywords: Canada, cointegration, money demand, vector autoregression
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

References

Ball, L., 2001, Another Look at Long–Run Money Demand, Journal of Monetary Economics 47, 31-44.

Granger, C. W. J. and Newbold, P. (1974), Spurious regressions in econometrics. Journal of Econometrics 2 (2): 111–120.

Granger, Clive (1981), Some Properties of Time Series Data and Their Use in Econometric Model Specification. Journal of Econometrics 16 (1): 121–130.

Engle, Robert F.; Granger, Clive W. J. (1987). Co-integration and error correction: Representation, estimation and testing. Econometrica 55 (2): 251–276.

Lucas, R. E., 1988, Money Demand in the United States: A Quantitative Review, Carnegie Rochester Conference Series on Public Policy 29, 137–168.

Meltzer, A. H., 1963, The Demand for Money: Evidence from Time Series, Journal of Political Economy 71, 219–246

Verbeek, M. (2009). A guide to modern econometrics. J. Wiley & Sons press.