The representative household's demand for money in a cointegrated VAR model

Author: Pétursson, Thórarinn G.

Source: The Econometrics Journal, Volume 3, Number 2, December 2000 , pp. 162-176(15)

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Abstract:

A representative household model with liquidity services directly in the utility function is used to derive a stable, data congruent error correction model of broad money demand in Iceland. This model gives a linear, long-run relation between real money balances, output and the opportunity cost of holding money that is used to over-identify the cointegrating space. The over-identifying restrictions suggest that the representative household is equally averse to variations in consumption and real money holdings. Finally, a forward-looking interpretation of the short-run dynamics, assuming quadratic adjustment costs, cannot be rejected by the data.

Keywords: Money demand; Money-in-the-utility function; Cointegration; Forward looking behaviour

Document Type: Research article

DOI: http://dx.doi.org/10.1111/1368-423X.00044

Affiliations: 1: Central Bank of Iceland, Economics Department, Reykjavík, and Reykjavík University, Iceland

Publication date: 2000-12-01