Scandinavian Working Papers in Economics

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

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

Jürgen Wolters , Timo Teräsvirta () and Helmut Lütkepohl
Additional contact information
Jürgen Wolters: Department of Statistics and Econometrics, Postal: Freie Universität Berlin, D-14195 Berlin, Germany
Timo Teräsvirta: Department of Economic Statistics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden
Helmut Lütkepohl: Department of Statistics and Econometrics, Postal: Humboldt-Universitat zu Berlin, D-10178 Berlin, Germany

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

JEL-codes: C52; E41

19 pages, April 1996

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