A Nonlinear Specification of Demand for Narrow Money in Colombia
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
A nonlinear smooth transition regression (STR) model of the demand for narrow money in Colombia is specified using monthly data for cash, prices, the scale variable (industrial GDP), the interest rate and the rate of depreciation, within the single equation framework allowed by the data. In comparison with the linear error correction model, the nonlinear specification is highly superior according to the statistics. The dynamics described by this model matches both the magnitudes and the behavior of the aggregate demand for cash in Colombia during the sample period (1982.2-1998.11).
