The Representative Households Demand for Money in a Cointegrated VAR model

Title : The Representative Households Demand for Money in a Cointegrated VAR model
Author : Thorarinn G. Petursson
Publisher : The Econometrics Journal
Volume : VOL. 3, NO. 2, 2000, P.162-176

Summary

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 vadations 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

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