Fractional Cointegration and Aggregate Money Demand Functions

17 Pages Posted: 26 Dec 2005

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Luis A. Gil-Alana

University of Navarra - Department of Economics

Abstract

In this paper we examine aggregate money demand relationships in five industrial countries using a two-step strategy for testing the null hypothesis of no cointegration against alternatives that are fractionally cointegrated. Fractional cointegration would imply that, although there exists a long-run relationship, the equilibrium errors exhibit slow reversion to zero, i.e. that the error correction term possesses long memory, and hence deviations from equilibrium are highly persistent. It is found that the null hypothesis of no cointegration cannot be rejected for Japan. In contrast, there is some evidence of fractional cointegration for the remaining countries, i.e. Germany, Canada, the USA and the UK (where, however, the negative income elasticity that is found is not theory-consistent). Consequently, it appears that money targeting might be the appropriate policy framework for monetary authorities in the first three countries, but not in Japan or in the UK.

Suggested Citation

Caporale, Guglielmo Maria and Gil-Alana, Luis A., Fractional Cointegration and Aggregate Money Demand Functions. The Manchester School, Vol. 73, pp. 737-753, December 2005, Available at SSRN: https://ssrn.com/abstract=857696 or http://dx.doi.org/10.1111/j.1467-9957.2005.00475.x

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

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Berlin, 10117
Germany

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

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