Munich Personal RePEc Archive

Policy Uncertainty and the Demand for Money in Australia: An Asymmetry Analysis

BAHMANI-OSKOOEE, Mohsen and Maki Nayeri, Majid (2017): Policy Uncertainty and the Demand for Money in Australia: An Asymmetry Analysis.

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Abstract

Previous research considered impacts of monetary and output uncertainty on the demand for money in Australia using a linear model and found that while output volatility has significantly positive effects, money supply volatility does not. Furthermore, predictive power of the linear model was very low. In this paper we use a nonlinear model and a new measure of uncertainty known as policy uncertainty and show that this new measure has significantly long-run asymmetric effects on the demand for money in Australia. Due to nonlinear adjustment of policy uncertainty measure, the new nonlinear model has a very high predictive power. The adjusted R2 moves from 0.30 in the linear model to 0.80 in the nonlinear model.

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