Modelling Short-run Money Demand for the US
There is a vast amount of empirical evidence concerning the cointegrating relationship between money demand, some kind of interest rate and income. In contrast to this, short-run dynamics are still opaque. In the existing literature, the return to steady state is modeled quite differently. The range goes from simple error correction models to non-linear approaches. Here a method is proposed for considering not only disequilibria between money demand and its steady state of only the last period but also those of the recent past in a parsimonious and economic meaningful way. Different to multicointegration, weights for cumulating of steady-state deviations are geometrically decreasing the more they are located in the past. This model possesses an ARMA (1,1) representation and leads to an ARMAX-model if combined with a conventional error correction model. This approach is shown to track money demand short-run dynamics better and more parsimony than the partial-adjustment model as used by Ball using the same data in order to allow for a comparison of results.