Non‐linear error correction and the UK demand for broad money, 1878–1993

Abstract

SUMMARYIn this paper we reconsider an error-correction model of UK broad money demand by Ericsson, Hendry and Prestwich. Their model is non-linear in both variables and parameters, and it can be viewed as an approximation to a smooth transition regression (STR) type specification. The corresponding STR model, when specified and estimated, fits the data better than the original model. Adopting a somewhat more general modelling approach leads to another STR model. This model variance dominates the other two, and the encompassing tests performed in this paper indicate that it is an improvement over the other two specifications.

Nonlinear Equilibrium Correction in U.S. Real Money Balances, 1869-1997

“…The model proposed is shown to be stable over the full sample period examined and the finding of significant nonlinearity in the empirical money demand equation is consistent with several related empirical studies (e.g., inter alia, Hendry and Ericsson, 1991a;Lütkepohl, Teräsvirta and Wolters, 1999;Sarno, 1999;Teräsvirta and Eliasson, 2001).…”

“…The resulting model displays insignificant diagnostics (including the appropriate parameter constancy test), yielding a sizable reduction in the residual variance relative to the best fitting linear ECM (about 15 percent). Nevertheless, using the minimal nesting strategy of Mizon and Richard (1986) and applying a simplification encompassing test between the STR model given in Table 3 and the best fitting linear ECM in Table 1 as done, for example, in Sarno (1999) and Teräsvirta and Eliasson (2001), indicated that the nonlinear ECM does not encompass the linear ECM at the five percent significance level (although it does at the one percent level) without being encompassed.…”

Evidence on nonlinear error correction in money demand: the case of Taiwan

“…Both studies have found a clear structural instability that occurred in 1990, the year of German uni-® cation, and a signi® cant asymmetric eOE ect of the in¯ation rate on the demand for money. Other STECM studies by Tera È svirta and Eliasson (1998), and by Sarno (1999) also ® nd similar nonlinear dynamics in the demand for money in UK and Italy.…”

Nonlinear and asymmetric pricing behaviour in the Spanish gasoline market

“…Similar models to equation (10) but with the possibility of affecting all the dynamic parameters are for example discussed in Teräsvirta and Eliasson (2001).…”