No. 690 - Nonlinearities in the dynamics of the euro area demand for M1

by Alessandro Calza and Andrea Zaghini
September 2008
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The paper finds evidence of non-linearities in the dynamics of the euro-area demand for the narrow aggregate M1. A long-run money demand relationship is first estimated over a sample period covering the last three decades. While the parameters of the relationship are jointly stable, there are indications of non-linearity in the residuals of the error-correction model. This non-linearity is explicitly modelled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of non-linearities in the dynamics of adjustment to equilibrium stemming from "buffer stock" and "target-threshold" models and with analogous empirical evidence for European countries and the US.

Published in 2009 in: Macroeconomic Dynamics, v. 13, 1, pp. 1-19

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  1. 16 October 2008
    No. 690 - Nonlinearities in the dynamics of the euro area demand for M1
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