Advertisement

Atlantic Economic Journal

, Volume 15, Issue 4, pp 16–21 | Cite as

Inconsistency in correcting for serial correlation in money-demand models

  • Joseph Aschheim
  • George S. Tavlas
Articles
  • 12 Downloads

Conclusion

Our results demonstrate that none of the estimated coefficients obtained by applying the Cochrane-Orcutt technique to partial-adjustment money-demand models is dependable: each of the parameter estimates is inconsistent. The estimated coefficients of the explanatory variables will be biased even in large samples and can thus lead to misleading inferences about the income and interest-rate elasticities of the demand for money.

Keywords

Parameter Estimate Explanatory Variable International Economic Public Finance Serial Correlation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. J. Aschheim and G. S. Tavlas, “Econometric Modeling of Partial-Adjustment: The Cochrane-Orcutt Procedure, Flaws and Remedies,”Economic Modeling, forthcoming, 1988.Google Scholar
  2. R. Betancourt and H. Kelejian, “Lagged Endogenous Variables and the Cochrane-Orcutt Procedure,”Econometrica, 49, 1981, pp. 1703–78.Google Scholar
  3. J. T. Boorman, “The Evidence on the Demand for Money: Theoretical Formulations and Empirical Results,”Monetary Macroeconomics, T. Havrilesky and J. Boorman, eds., Arlington Heights, IL, 1977, pp.167–222.Google Scholar
  4. D. Cochrane and G. H. Orcutt, “Application of Least Squares Regressions to Relationships Containing Auto-Correlated Error Terms,”Journal of the American Statistical Association, 44, 1949, pp. 32–61.Google Scholar
  5. T. Cooley and S. LeRoy, “Identification and Estimation of Money Demand,”American Economic Review, 71, 1981, pp. 825–44.Google Scholar
  6. J. M. Dufour, M. J. I. Gaudry, and R. W. Hafer, “A Warning on the Use of the Cochrane-Orcutt Procedure Based on a Money Demand Equation,”Empirical Economics, 8, 1983, pp. 111–17.CrossRefGoogle Scholar
  7. S. M. Goldfeld, “The Demand for Money Revisited,”Brookings Papers on Economic Activity, 4, 1973, pp. 577–638.Google Scholar
  8. R. G. Gordon, “The 1981–82 Velocity Decline: A Structural Shift in Income or Money Demand?,”Monetary Targeting and Velocity, Conference Proceedings, Federal Reserve Bank of San Francisco, 1983, pp. 67–99.Google Scholar
  9. _____, “The Short Run Demand for Money: A Reconsideration,”Journal of Money, Credit, and Banking, 16, 1984, pp. 403–34.Google Scholar
  10. R. W. Hafer and S. E. Hein, “The Shift in Money Demand: What Really Happened?,” Federal Reserve Bank of St. Louis,Review, 64, 1982, pp. 11–6.Google Scholar
  11. M. Hamburger, “Recent Velocity Behavior, The Demand for Money and Monetary Policy,”Monetary Targeting and Velocity, Conference Proceedings, Federal Reserve Bank of San Francisco, 1983, pp. 11–6.Google Scholar
  12. S. E. Hein, “Short Run Money Growth Volatility: Evidence of Misbehaving Money Demand?,” Federal Reserve Bank of St. Louis,Review, 64, 1982, pp. 27–36.Google Scholar
  13. D. F. Hendry, “The Structure of Simultaneous Equations Estimators,”Journal of Econometrics, 4, 1976, pp. 51–88.CrossRefGoogle Scholar
  14. _____, and G. F. Mizon, “Serial Correlation as a Convenient Simplification, Not a Nuisance: A Comment on a Study of the Demand for Money by the Bank of England,”Economic Journal, 88, 1978, pp. 549–63.Google Scholar
  15. _____, and F. Srba, “The Properties of Autoregressive Instrumental Variables Estimators in Dynamic Systems,”Econometrica, 45, 1977, pp. 969–90.Google Scholar
  16. C. Hildreth and J. Y. Lu, “Demand Relationships with Autocorrelated Disturbances,”Technical Bulletin, 276, Agricultural Experimental Station, Michigan State University, 1960.Google Scholar
  17. C. G. Judge, W. E. Griffiths, R. C. Hill, H. Lutkepohl, and T. C. Lee,The Theory and Practice of Econometrics, New York, 1985.Google Scholar
  18. D. Laidler,The Demand for Money: Theories, Evidence, and Problems, New York, 1985.Google Scholar
  19. _____, “The Demand for Money in the United States—Yet Again,”On the State of Macro-Economics, K. Brunner and A. Meltzer, eds., Carnegie-Rochester Conference Series on Public Policy, 12, Amsterdam, 1980, pp. 219–71.Google Scholar
  20. _____, “Discussion,”Monetary Targeting and Velocity, Conference Proceedings, Federal Reserve Bank of San Francisco, 1983, pp. 100–03.Google Scholar
  21. L. T. Oxley and C. J. Roberts, “Pitfalls in the Application of the Cochrane-Orcutt Technique,”Oxford Bulletin of Economics and Statistics, 44, 1982, pp. 227–40.Google Scholar
  22. W. Poole, “Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model,”Quarterly Journal of Economics, 84, 1970, pp. 197–216.Google Scholar
  23. J. D. Sargan, “Wages and Prices in the United Kingdom: A Study in Economic Methodology,”Colston Papers, 16, London: Butterworth Scientific Publications, 1964.Google Scholar
  24. R. Schonfeld, “A Useful Central Limit Theorem form-Dependent Random Variable,”Metrikam, 17, 1971, pp. 116–28.Google Scholar
  25. J. Tatom, “Alternative Explanations of the 1982–83 Decline in Velocity,”Monetary Targeting and Velocity, Conference Proceedings, Federal Reserve Bank of San Francisco, 1983, pp. 22–56.Google Scholar

Copyright information

© Atlantic Economic Society 1987

Authors and Affiliations

  • Joseph Aschheim
    • 1
  • George S. Tavlas
    • 2
  1. 1.The George Washington UniversityUSA
  2. 2.International Monetary FundUSA

Personalised recommendations