SFB 303 Discussion Paper No. B - 153

Author: Schmidt, Roland
Title: Cointegration and the Demand for Money - An Empirical Evaluation for West Germany
Abstract: This paper discusses the theory of testing for cointegration within a money market model. In the theoretical part we explain why the testing procedure recommended by Engle and Granger (1987) too often accepts cointegration and we give an alternative. We apply the cointegration theory to the German money demand and show that
  1. the nominal money stock and the price level are cointegrated,
  2. money is neutral only in the long run and
  3. no cointegration is detected between the real money stock, income and the interest rate.We interpret the results with respect to stochastic and deterministic trend specifications and find the latter more appropriate.
    Keywords: Money market model, Theory of testing for cointegration, German money demand
    Creation-Date: June 1990
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