Evidence on nonlinear error correction in money demand: the case of Taiwan

This paper proposes a nonlinear error-correction model based upon smooth tr ansition regression methodology. The model is specified such that the short -run adjustment toward long-run equilibrium is nonlinear and that the error correction is a smooth function of long-run deviation. Empirical results o btained from estimating M2 money demand in Taiwan support the hypothesis of a nonlinear error-correction process and provide better interpretation of change in the demand for money.