Nonparametric Estimation of Nonlinear Money Demand Cointegration Equation by Projection Pursuit Methods

Money demand equation continues to attract attention of econometricians with a new wrinkle provided by cointegration. We use projection pursuit (PP) regressions pioneered by Friedman and Stuetzle (1981) to suggest new estimates of partials of conditional expectations of the regressands with respect to the regressors and prove their consistency. Since the usual cointegration methodology involves linear relations, carefully chosen directions where generalized additive structure is preserved by PP methods is more flexible. These methods are computationally demanding, since the bootstrap needs to be used for confidence statements. Our numerical estimates with 18 regressors yield narrow confidence intervals.