Estimation of a German Money Demand System -a Long-run Analysis

The aim of this analysis is to derive stable long-run relationships that innuence the conduct and transmission process of the German monetary policy. In this context, a special emphasis is on the question whether there is a stable long-run money demand in Germany as a precondition for monetary targeting. A multivariate analysis using seasonally unadjusted data is presented. The sample period analysed covers the years 1979(1) to 1994(2), thereby including German reuniication. The initial VAR comprises the variables real money M3, real GNP, the innation rate, a long-term and a short-term interest rate. Three stable cointegration vectors are obtained within the framework of the Johansen procedure: a money demand relationship, a long-run Fisher eeect and a long-run relationship between the short-and the long-term interest rate. I would like to thank Helmut L utkepohl, J urgen Wolters and JJ org Breitung for many valuable comments and discussions. I am also grateful to Neil Ericsson and participants of the ESEM96 (Istanbul) for helpful comments. Responsibility for any remaining errors is, however, mine alone. The research for this paper was carried out within the Sonderforschungsbereich 373 at the Humboldt University Berlin and was printed using funds made available by the Deutsche Forschungsgemeinschaft.