MODELING MONEY DEMAND IN GERMANY

In this paper an empirically stable money demand model for M3 in Germa ny is presented. The sample period 1975-94 includes German unification . It is shown that this development has not substantially destabilized money demand. Parameter stability is extensively tested and not rejec ted. Applying encompassing tests, this model encompasses two recent mo dels but is not encompassed by them. Exogeneity of the explanatory var iables is discussed and tested along the definitions given in Engle, H endry and Richard (1983). There is evidence that inflation and long-te rm interest rates are super-exogenous with respect to the parameters o f the demand for M3 model. This result and the empirical long-run mone y demand function presented in this paper may affect the applicability of the so called 'P-Star concept' for German M3. (C) 1998 John Wiley & Sons, Ltd.