Dynamic Specification of The Demand for Currency. An Application of Co-integration Techniques. Argentina 1977-1988

Abstract

This study presents a model of the demand for currency in a complex highly-inflationary enviroment: Argentina 1977-1988. The econometric serach of a model - which can be considered as a satisfactory approximation of the data generating process o real cash balances - focussed, at this stage, on a group of "basics" variables given by usuak economic theories of the demand for money. Firstly, the porpuse is to concentrate on the "long-run" determinants usingt an information set which includes interest rates, domestic prices and transactions. Co-integration technics, proposed by Granger and Engle (1987) are applied in order to evaluate a "long-run" hypothesis. Data information are also used to specify the dynamic of the model following the methodology "general - to - particular" developed by Hendry et. al. The model selected incorporates a linear correction mechanism and an asymetric effect mof inflation. It has a suitable economic interpretation and satisfied a set of criteria to be considered as a "tentative" approximation to be underlying data generating process of real cash balances.