Scandinavian Working Papers in Economics

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

No 265: Nonlinear error-correction and the UK demand for broad money, 1878-1993

Timo Teräsvirta () and Ann-Charlotte Eliasson
Additional contact information
Timo Teräsvirta: Dept. of Economic Statistics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Ann-Charlotte Eliasson: Dept. of Economic Statistics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: This paper reconsiders a nonlinear error-correction model of UK broad money demand by Ericsson, Hendry and Prestwich. Their model can be viewed as an approximation to a smooth transition regression (STR) type specification. The corresponding STR model, when estimated, turns out to encompass the previous model. Adopting a somewhat more general modelling approach leads to another STR model. This model variance dominates the other two but does not encompass them. Nevertheless, it fits better than the other models in the eventful 1970s and 1980s.

Keywords: Dynamic model; econometric model building; encompassing; parameter constancy; smooth transition regression.

JEL-codes: C52; E41

27 pages, First version: October 7, 1998. Revised: November 30, 1998.

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