bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

educed-form equations
partial adjustment equations
dynamic specification
non-stationary variables
Questions and exercises
1. It is widely accepted in science that it is not possible through empirical
testing to prove anything. All one can do is to refute hypotheses. How scientific,
then, is the testing of the demand for money?
2. Consider the list of variables that the text suggests might be included in
an equation for the demand for money based on theory. Link each variable
to a particular theory discussed in Chapter 5.
3. In what way is it favourable to monetarist views if:
(a) the interest elasticity of the demand for money is low?
(b) the demand for money is correctly specified in real terms?
4. Consider the equation:
m t = θβ 0 + θβ 1y t + θβ 2i t + θv + (1 − θ)m t-1
TESTING THE DEMAND FOR MONEY 169
cointegrating vectors
error correction models
buffer stock models
ergodicity
Does the assumption that the time lag on the income term should be the
same as that on the interest rate term cause any problems?
5. Explain the following statement from the text and give some examples:
‘However, the closeness of substitutes varies with the definition of money,
which itself varies as innovations in very liquid assets take place. Even with
a constant definition of money, the choice of the closest substitutes for
money changes through time.’
6. Why might it be reasonable to replace an expectational variable in an
equation with a dummy variable or a trend term? What is being assumed
when a trend term is used?