Test of the Adjustment Process and Linear Homogeneity in a Stock Adjustment Model of Money Demand

Abstract

Stock adjustment models of money demand have employed either the nominal or real adjustment process, but they have not been tested statistically due to their nonnestedness. This paper formulates a general stock adjustment model which includes both nominal and real adjustment processes as its nested subsets. Each process is then tested against the general specification. The paper also examines the homogeneity of money demand with respect to price level and income in the general model.

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