Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 64: Investigating Stability and Linearity of a German M1 Money Demand Function

Helmut Lütkepohl , Timo Teräsvirta () and Jürgen Wolters
Additional contact information
Timo Teräsvirta: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

Abstract: Starting from a linear error correction model the stability and linearity of a German M1 moneyt demand function are investigated, applying smooth transition regression techniques. Using seasonally unadjusted data from 1961 (1) to 1990 (2) it is found that the money demand equation is both linear and stable. After extending the sampling period until 1994 (2) a clear structural instability due to the mnonetary unification 1 July 1990 is found and subsequently modelled.

Keywords: Error correction; German monetary unification; Nonlinearity; Smooth transition regression; Structural Change

JEL-codes: C22; C52; E41

22 pages, August 1995

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