Breaks in the UK household sector money demand function

We use non-parametric procedures to identify breaks in the underlying series of UK household sector money demand functions. Money demand functions are estimated using cointegration techniques and by employing both the Simple Sum and Divisia measures of money. P-star models are also estimated for out-of-sample inflation forecasting. Our findings suggest that the presence of breaks affects both the estimation of cointegrated money demand functions and the inflation forecasts. P-star forecast models based on Divisia measures appear more accurate at longer horizons and the majority of models with fundamentals perform better than a random walk model.

Household sector money demand for the UK

We test for the existence of a long-run money demand relationship for the UK involving household-sector Divisia and simple sum monetary indexes for the period from 1977 to 2008. We construct our Divisia index using non-break-adjusted levels and break-adjusted flows following the Bank of England. We test for cointegration between the real Divisia and simple sum indexes, their corresponding opportunity cost measures, real income and real share prices. Our results support the existence of a long-run money demand relationship for both the Divisia and simple sum indexes.