Structural breaks, cointegration, and speed of adjustment Evidence from 12 LDCs money demand

This article estimates a theoretically coherent and empirically robust money demand function for 12 developing countries. The modeling procedure not only tests for a regime shift in the cointegrating equation, but also in the error correction model. Five specific hypotheses are examined. The article...

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Bibliographic Details
Published in:International review of economics & finance 1999, Vol.8 (4), p.399-420
Main Authors: Arize, Augustine C., Malindretos, John, Shwiff, Steven S.
Format: Article
Language:English
Subjects:
Adjustment
Cointegration
LDCs money demand
Structural breaks
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Summary:This article estimates a theoretically coherent and empirically robust money demand function for 12 developing countries. The modeling procedure not only tests for a regime shift in the cointegrating equation, but also in the error correction model. Five specific hypotheses are examined. The article demonstrates that a long-run equilibrium relationship exists between real M1 or M2 balances, real income, inflation, exchange rate, foreign exchange risk, and foreign interest rates in the countries studied. The study provides information on the speed of adjustment to equilibrium and the median and mean time lags for adjustment of real money balances to changes in each determinant. Although our results provide more evidence against M1 than M2, this study clearly establishes that both M1 and M2 must be considered as viable policy tools for less developed countries.
ISSN:1059-0560
1873-8036
DOI:10.1016/S1059-0560(99)00025-8