Modelling the demand for money in New Zealand

The paper reports on the results of estimating both the longand short-run demand for money function in New Zealand, 1990–2000 using quarterly data and cointegrationand error-correction-based models. It is found that price, real income and interest rate variables are integrated of order 1 or I(1). Using Phillips and Hansen [Rev. Econ. Stud. 57 (1990) 99] fully modified estimation methods, we establish the existence of a long-run cointegrating relationship among these three variables. Using the residuals from this model to represent the error-correction mechanism (ECM) term, we identify a short-run model utilising Hendry’s general-to-specific (GTS) approach. The model is shown to satisfy the typical diagnostic requirements of a multiple regression model. Three event dummies are used to capture key events of relevance to monetary policy in New Zealand. © 2003 IMACS. Published by Elsevier B.V. All rights reserved.