Non-linear error correction and the UK demand for broad money, 1878-1993

In this paper we reconsider an error-correction model of UK broad money dem and by Ericsson, Hendry and Prestwich. Their model is non-linear in both va riables and parameters, and it can be viewed as an approximation to a smoot h transition regression (STR) type specification. The corresponding STR mod el, when specified and estimated, fits the data better than the original mo del. Adopting a somewhat more general modelling approach leads to another S TR model. This model variance dominates the other two, and the encompassing tests performed in this paper indicate that it is an improvement over the other two specifications. Copyright (C) 2001 John Wiley & Sons, Ltd.