By Dennis L. Hoffman

The econometric outcomes of nonstationary info have huge ranging im plications for empirical examine in economics. particularly, those matters have implications for the examine of empirical family members similar to a funds call for func tion that hyperlinks macroeconomic aggregates: genuine cash balances, actual source of revenue and a nominal rate of interest. conventional financial concept predicts that those nonsta tionary sequence shape a cointegrating relation and as a result, that the dynamics of a vector method created from those variables generates distinctive styles. Re cent econometric advancements designed to deal with nonstationarities have replaced the process empirical examine within the zone, yet many basic demanding situations, for instance the problem of id, stay. This ebook represents the efforts undertaken by means of the authors lately to be able to make sure the implications that nonstationarity has for the learn of combination cash call for family. we've got introduced jointly an empirical technique that we discover worthwhile in undertaking empirical examine. a number of the paintings used to be undertaken in the course of the authors' sabbatical sessions and we want to recognize the beneficiant help of Arizona country collage and Michigan country college respectively. Professor Hoffman needs to recognize the help of the Fulbright-Hays origin that supported sabbattical learn in Europe and separate help of the Council of a hundred summer time study application at Arizona nation University.

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A-max statistics. Critical values for Ho(r) and Ho(r) are given in Johansen (1991) and critical values for H1(r) and Hi(r) are given in Osterwald-Lenum (1992) and Johansen and Nielsen (1993). Johansen (1991) shows that likelihood ratio tests for reduction in the degree of trend may be formed from the eigenvalues obtained from his well known reduced rank regression procedure. A2 i, i = 1, ... ,p respectively and order each set of eigenvalues from iarge~t to sm~llest. Aj-1,i)} rv X~r) for j = 1,2.

3), is satisfied and the system represents p distinct stationary processes. Alternatively; when the rank of TI equals 0, the system is comprised of p separate 1(1) processes driven by p independent sources of nonstationarity. This is the implicit assumption maintained in conventional multivariate time series analysis where nonstationarity is addressed by simply "integrating" or differencing the vector process until stationarity is obtained. When the rank of TI equals r with 0 < r < p, the system exhibits cointegration and TI may be written as the product of two p x r matrices; TI = af3' that each exhibit rank r.

Economic theory clearly predicts a link between real balances, real income and a measure of opportunity cost for maintaining cash balances. The origin of this aggregate relation lies in the work of Baumol (1952), Tobin (1956) and Friedman (1956) while Lucas (1988) demonstrates how micro foundation for the relationship may be established in a representative agent setting. , Johansen and Juselius (1990), Hoffman and Rasche (1991), King, Plosser, Stock and Watson (1991)) suggests that a cointegrating or long-run relation does indeed prevail among the variables that comprise a money demand model.