Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 113:
Modelling the Demand for M3 in the unified Germany

Jürgen Wolters, Timo Teräsvirta () and Helmut Lütkepohl

Abstract: An error correction model for the demand for real M3 money is constructed for the period 1976-1994 with real GNP, the GNP deflator as well as a short-term and a long-term interest rate as explanatory variables. Quarterly, seasonally unadjusted data are used in estimating the model. It is found that there is a clear structural break due to the German unification in 1990. On the other hand, once this structural break is accounted for, a stable relation is found which passes a series of misspecification tests. In particular, a number of recent tests of parameter constancy and linearity are applied. Our specification is at variance with findings reported by some other researchers, notably the Deutsche Bundesbank.

Keywords: Econometric modelling; nonlinearity; parameter constancy; smooth transition regression; structural break; (follow links to similar papers)

JEL-Codes: C52; E41; (follow links to similar papers)

19 pages, April 1996

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This paper is published as:
Wolters, Jürgen, Timo Teräsvirta and Helmut Lütkepohl, (1998), 'Modelling the Demand for M3 in the unified Germany', Review of Economics and Statistics, Vol. 80, pages 399-409

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