Dynamic specification of private bills and coins (monthly series), using cointegration techniques

Abstract

The econometric study of the demand for banknotes and coins held by the public with monthly data, following a “general to particular” methodology for dynamic specification (see, for example, Mizon and Hendry, 1980), presented serious difficulties to obtain a satisfactory parameterization, mainly of the representative aggregate transactions variable. Since there was no monthly series (or a satisfactory monthlyization) to approximate them, unrestricted estimates using simple linear distributions of quarterly data did not allow any simplification with appropriate interpretation, either by including them in an Error Correction term in differences or levels. Due to the resistance to exclude the transaction variable –even if it was measured in a very preliminary way through ad hoc monthlyizations– from the money demand, this article attempted to follow a different approach by trying to explore, before specifying the dynamic structure, whether there was an equilibrium relationship between money (bills and coins held by the public) and transactions (monthlyization of the total supply series). For this, the Co-Integration techniques proposed by Granger and Engle (1987) were applied.

JEL classification: C22 ; E41