Applying the seasonal error correction model to the demand for international reserves in Taiwan

A dynamic demand function for international reserves based on the seasonal difference is derived. Our model of using seasonal difference distinguishes the present study from previous studies in three aspects. First, the depen dent variable is seasonally differenced instead of being first order differ enced. Next, the local money market disequilibrium included is also in four th difference form. Finally, given the existence of stochastic seasonality, a new model, using a seasonal error correction rather than the conventiona l error correction, is specified and estimated. Based on this new specifica tion, the results yielded are more sensible than those of using a differenc ed model. (C) 1999 Elsevier Science Ltd. All rights reserved.