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NONLINEAR ERROR CORRECTION: THE CASE OF MONEY DEMAND IN THE UNITED KINGDOM (1878–2000)

Published online by Cambridge University Press:  30 January 2004

ALVARO ESCRIBANO
ALVARO ESCRIBANO
Affiliation:
Universidad Carlos III de Madrid, Spain
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Abstract

This paper explores single-equation nonlinear error correction (NEC) models with linear and nonlinear cointegrated variables. Within the class of semiparametric NEC models, we use smoothing splines. Within the class of parametric models, we discuss the interesting properties of cubic polynomial NEC models and we show how they can be used to identify unknown threshold points in asymmetric models and to check the stability properties of the long-run equilibrium. A new class of rational polynomial NEC models is also introduced. We found multiple long-run money demand equilibria. The stability observed in the money-demand parameter estimates during more than a century, 1878 to 2000, is remarkable.

Keywords

Money DemandNonlinear Error CorrectionCubic PolynomialsRational PolynomialsSmoothing SplinesNonlinear Cointegration
Type
Research Article
Information
Macroeconomic Dynamics , Volume 8 , Issue 1 , February 2004 , pp. 76 - 116
Copyright
© 2004 Cambridge University Press

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