de Haan, Jakob; Zelho s , Dick
A icle
Financial De egula ion and he S abili y o he Demand o
Money in Aus alia
K edi und Kapi al
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: de Haan, Jakob; Zelho s , Dick (1991) : Financial De egula ion and he S abili y o
he Demand o Money in Aus alia, K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin,
Vol. 24, Iss. 3, pp. 319-331,
h ps://doi.o g/10.3790/ccm.24.3.319
This Ve sion is a ailable a :
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Financial De egula ion and he S abili y
o he Demand o Money in Aus alia
By Jakob de Haan and Dick Zelho s *, G oningen/Ne he lands
I. In oduc ion
Rising in la ion a es du ing he 1970's led o he adop ion o mone a y
a ge s as a guide o mone a y policy in a numbe o indus ialized coun ies.1
Aus alia was one o he i s OECD coun ies o se ou p ojec ions o he
money s ock. The majo in e media e goal o he Aus alian mone a y
au ho i ies has been he g ow h a e o M3; his agg ega e is de ined as cu -
ency in ci cula ion plus o al deposi s (including CD's) wi h all ading and
sa ing banks. The g ow h a e o M3 has been announced in ad ance as a
"condi ional p ojec ion". While no in ended as a s ic a ge , bu a he as
a guide bo h o ma ke s and he Rese e Bank, i was indica ed in he 1976
Budge ha a g ow h a e o M3 in he 10-12 pe cen ange du ing he yea
would be consis en wi h he educ ion o in la ion. Simila p ojec ions ha e
been published o subsequen yea s.2
A policy o mone a y a ge ing equi es a s able money demand unc ion.3
This means a well-de ined and s able ela ionship be ween money, in e es
a es and GNP. As Judd & Scadding pu i : "Wha is being sough in a s able
demand unc ion is a se o necessa y condi ions o money o exe a p e-
dic able in luence on he economy so ha he cen al bank's con ol o he
* The au ho s would like o hank Jan Jacobs and he e e ee o hei commen s on
a p e ious e sion o his pape .
1 Fo an accoun o he sp ead o mone a y " a ge y" du ing he 1970's see OECD
(1979).
2 See OECD (1983). Co den (1989) e en a gues ha "con a y o he images c ea ed
du ing he s abiliza ion pe iod, Aus alian mone a y policy was no eally mone a is
in any sense o he e m ... In mos yea s he e was no sugges ion ha he au ho i ies
we e i mly commi ed o he p ojec ions ..." [Co den, (1989), p. 160]. S ill, "condi-
ional p ojec ions" o M3 g ow h we e ela i ely close o ac ual ou comes.
3 O cou se, a s able ela ionship be ween money and key mac oeconomic a iables
is no he only c i e ion o choosing an in e media e a ge . I is also impo an ha
he a ge a iable can be con olled by he mone a y au ho i ies gi en he a ailable
ins umen s.
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320 Jakob de Haan and Dick Zelho s
money supply can be a use ul ins umen o economic policy" [Judd & Scad-
ding (1982), p. 993]. The e idence on he s abili y o con en ional money
demand unc ions o Aus alia is mixed. While Ju ne & Tuckwell (1974)
and Pagan & Volke (1981) conclude, o ins ance, ha he e is li le e i-
dence o ins abili y in he demand o Ml, Sha pe & Volke (1979), Hun &
Volke (1981) and Kanniainen & Ta kka (1986) ha e - o a ious easons -
se ious doub s abou he s abili y o he s anda d demand o (b oad)
money.4
The conduc o Aus alian mone a y policy has been inc easingly compli-
ca ed in ecen yea s by he g owing in eg a ion o domes ic and o eign
inancial ma ke s and by de egula ions o he inancial sys em. Polasek &
Lewis (1985) conclude ha in he ea ly 1980's he e has been a ma ked accel-
e a ion o Aus alia's inancial in eg a ion wi h he es o he wo ld. The
ecen de egula ion o Aus alia's inancial sys em, which in ol ed in e
alia he loa ing o he Aus alia dolla in Decembe 1983, may also ha e had
some e ec on he s abili y o he demand o money.5 Hall (1985) a gues
ha especially in he ansi ion pe iod o a de egula ed en i onmen , he
in e p e a ion o he a ge ed M3 is p oblema ic. Indeed, he go e nmen
has abandoned he condi ional p ojec ions o M3 in ea ly 1985. Policy se -
ing is now made on he basis o a so-called "check lis " in which he
au ho i ies e iew a wide ange o inancial and economic indica o s [see
OECD (1987)].
A common ea u e o mos s udies on he demand o money is ha a long-
un equilib ium money demand unc ion is p esumed be o ehand. Recen ly,
howe e , he e has been a shi om p esuming his ela ionship owa ds
sea ching " o examine and es o he p esence o such a long- un equilib-
ium ela ionship be ween a iables di ec ly, (be o e embedding hem in
equa ions which also explo e sho - un dynamic adjus men s), by es ing
whe he such a iables a e coin eg a ed" [Goodha (1989), p. 311]. Coin e-
g a ion es s a e a me hod o explo e long- un ela ionships be ween non-
s a iona y ime se ies. I hese a iables a e coin eg a ed, he e exis s a
s ochas ic long- un equilib ium be ween hem. I is an equilib ium in he
sense ha he non-s a iona y se ies do no d i away, bu mo e oge he in
he long- un.
4 Hoa (1982) a gues ha ins abili y o he money demand unc ion may be caused
by a unc ionally o pa ame ically misspeci ied equa ion, bu , un o una ely he does
no es his es ima ed unc ion o Aus alia on ins abili y. Milbou ne (1983) does also
no examine he s abili y o his p e e ed money demand unc ion.
5 See Swamy and Ta los (1989) o a e iew o he inancial de egula ion in
Aus alia and i s consequences o he s abili y o he money demand unc ion.
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Financial De egula ion in Aus alia 321
Va ious au ho s ha e in es iga ed whe he mone a y agg ega es a e coin-
eg a ed wi h key mac oeconomic a iables. Engle & G ange (1987) ha e
ound ha in he US only M2 and GNP a e coin eg a ed. F iedman (1988)
concludes ha inancial quan i y a iables ha e los hei ele ance o US
mone a y policy in he 1980s. In con as , T ehan (1988) concludes on he
basis o coin eg a ion es s ha in Ge many bo h he Cen al Bank Money
(Zen albankgeldmenge) - which is a weigh ed a e age o he componen s o
he b oad mone a y agg ega e M3 - and M3 sa is y he equi emen s o an
in e media e a ge a iable. Cesa , De Haan & Jacobs (1990) ha e ound
ha M2 in he Ne he lands is no coin eg a ed wi h GNP and in e es a es.
In his pape we examine whe he Ml and M3 a e coin eg a ed wi h some
key mac oeconomic a iables in Aus alia. The pape is o ganized as ol-
lows. Sec ion II b ie ly desc ibes he main ea u es o coin eg a ion. Sec ion
III p esen s ou esul s, and sec ion IV con ains some concluding commen s.
II. Coin eg a ion Theo y
A a iable which exhibi s no endency o e u n o i s o iginal le el ol-
lowing a dis u bance is non-s a iona y. A simple example is a andom walk
wi h d i : V =
y +
2/ -i
+
2/o = 0,
whe e e is, o ins ance, an unco ela ed and iden ical e o p ocess. The
p ocess y has a uni oo , because he coe icien o he lagged a iable has
he alue one. By di e encing such a a iable can be made s a iona y. In
case o a s a iona y a iable he e ec s o a andom dis u bance die ou o e
ime.6 A se ies ha needs o be di e enced d imes o become s a iona y is
deno ed 7(d), o "in eg a ed o o de d". Conside wo a iables x and yu
bo h 7(1). Then x and y a e said o be coin eg a ed i he e exis s a linea
combina ion z = y - I3x
(¡3 i=
0) which is s a iona y o 7(0). The ex en o
which x and y a e ou o equilib ium is measu ed by he "equilib ium
e o " z .
Es ima ing, and es ing o he exis ence o , coin eg a ing ec o s is sim-
ple. In he model z
=
y - $xu we need o es ima e
¡3
and ha e o es o he
s a iona i y o z . I bo h x and y a e 7(1), hen, in gene al, a linea combi-
na ion o x and yu will be 7(1) oo. Thus, almos all s will p oduce z se ies
wi h asymp o ically in ini e a iances. Only he coin eg a ing ec o s will
lead o z ha ing ini e a iance. O dina y Leas Squa es yields a good es i-
6 No e ha a andom walk wi h d i can be w i en as y
=
y
+
2J e , so he e ec s
o a andom dis u bance las pe manen ly.
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322 Jakob de Haan and Dick Zelho s
ma e o
¡3
since wi h OLS he a iance o he esiduals is minimised. So,
¡3
is
es ima ed by OLS in he model z
=
y - $x , all a iables a e in le els and
dynamics a e excluded om he model.
A s iking ea u e o coin eg a ion is ha i o e s o mal suppo o he
use o E o -Co ec ion-Mechanisms (ECMs) in econome ic models [see
Sa gan (1964)]. The idea o ECMs is simply ha a p opo ion o he dis-
equilib ium om one pe iod is co ec ed in he nex . I has been p o ed ha
he concep s o coin eg a ion and e o -co ec ion a e equi alen : i a coin-
eg a ed se o a iables is ound, i mus ha e an ECM ep esen a ion, and,
ECMs p oduce coin eg a ed a iables [Engle & G ange (1987)].7
Coin eg a ion echniques may be used o a ious pu poses [see G ange
(1986)]. In he nex sec ion we will examine o he case o Aus alia whe he
Ml and M3 a e coin eg a ed wi h some key mac oeconomic a iables. We
will also analyse whe he inancial de egula ion measu es ha e a ec ed he
ela ionship be ween he mone a y agg ega es and eal GDP and he in e -
es a e.
III. Analysing Mone a y Agg ega es
This sec ion p esen s an analysis o he p ope ies o wo mone a y agg e-
ga es: Ml and M3. Ml equals public's holdings o cu ency plus cu en
accoun s in comme cial banks; M3 equals Ml plus all accoun s in sa ings
and comme cial banks. Qua e ly da a on he mone a y agg ega es we e
kindly p o ided by he Rese e Bank o Aus alia.
Da a o GDP in cu en p ices a e om he Aus alian Na ional Accoun s
(Aus alian Bu eau o S a is ics) o he pe iod 1974.3 - 1989.2 and om he
IMF In e na ional Financial S a is ics (IFS) o he pe iod 1959.1 - 1974.2.
The in e es a e used is he yield on h ee yea go e nmen bonds as pub-
lished in he IFS (line 61a).
We use he na u al loga i hm o all se ies, excep o he in e es a e.
Money and GDP in cu en p ices a e de la ed using he consume p ice
index as published in he IFS (line 64). All se ies excep o he in e es a e
a e seasonally adjus ed using he mul iplica i e me hod o mic o-TSP ( e -
sion 6.5).
The i s s ep is o examine whe he he ime se ies o he a iables o
in e es ha e a uni oo . We ha e used he es s as p oposed by Phillips and
7 I should, howe e , be s essed ha i a coin eg a ed sys em o some mone a y
agg ega e and key mac oeconomic a iables exis s, his does no necessa ily imply
ha money demand is o he ECM o m.
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Financial De egula ion in Aus alia 323
Pe on (1988) and Pe on (1988). These es s a e modi ica ions o he well
known Dickey-Fulle (DF) and Augmen ed Dickey-Fulle (ADF) es s. The
DF es consis s o unning a eg ession be ween he i s di e ence o a a -
iable and i s lagged le el, including a cons an and a end a iable. Unde
he null hypo hesis ha he a iable has a uni oo , he coe icien o he
lagged le el should be equal o ze o. The null-hypo hesis is ejec ed i his
coe icien is signi ican ly less han ze o.8 To make su e ha he esiduals
a e whi e noise, lagged i s di e ences a e some imes included in he
eg ession. The es is hen called he Augmen ed Dickey-Fulle (ADF) es .
Phillips and Pe on ha e adjus ed he (A)DF s a is ics in such a way ha
hey become independen o he dis ibu ion o he esiduals.
Ou es ing s a egy is based upon Pe on (1988). The es -s a is ics a e all
based upon he ollowing models o a se ies y :
(1) y = /¿* + a*2/ _i + u?
(2) y = + p( -T/2) + ay .1 + u = 1,2,..., T.
Table
1
p esen s he s a is ics ha we use. We s a wi h equa ion (2), which
is he mos gene al model, and es o he p esence o a uni oo , using he
s a is ics Z(a), Z( s) and Z(&3).
The s a is ics Z(a) and Z( a) a e based on he es ima ed alue o he coe -
icien o he lagged a iable and i s ¿-s a is ic espec i ely. The dis ibu-
ions o hese s a is ics a e, howe e , no in a ian wi h espec o he alue
o he end pa ame e
¡3.
The s a is ic Z(03) is, he e o e, also used. This
s a is ic es s he join hypo hesis o a uni oo and a ze o end pa ame e .
I he null hypo hesis o a uni oo is ejec ed, he e is no need o go u he .
I he null hypo hesis canno be ejec ed, his may be due o he low powe
o he es s a is ics o equa ion (2) i he d i is ze o. We es o he absence
o he d i pa ame e
/i
using he s a is ic Z(&2)> I he join hypo hesis o a
ze o d i and end pa ame e and a uni oo canno be ejec ed, i may be
mo e app op ia e o use he es s a is ics, which a e based upon equa ion (1).
We hen employ Z(a*) and Z( a*). Since hese s a is ics a e no in a ian
wi h espec o he s a ing alue y0 o a se ies yu we also employ Z(<Pi) o
es he null hypo hesis o a uni oo .
8 The ¿-s a is ic does no ollow he usual S uden 's ¿-dis ibu ion. C i ical alues
a e abula ed in Fulle
(1976).
22 K edi und Kapi al 3/1991
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324 Jakob de Haan and Dick Zelho s
No e ha all s a is ics can be calcula ed wi h di e en unca ion pa a-
me e s [see Pe on (1988) o u he de ails].9 We ha e calcula ed he a ious
es s a is ics wi h ou di e en unca ion pa ame e s: one, ou , en and
six een.
Table 1: Tes S a is ics
Tes s a is ic Hypo hesis C i ical alues in:
Z(S) a = 1 in equa ion (2) Fulle (1976)
Z( 5) a = 1 in equa ion (2) Fulle (1976)
Z(*3) (/z,/?,a) = (/i,0,l) in eq. (2) Dickey and Fulle (1981)
Z{*2) (//,/?,a) = (0,0,1) in eq. (2) Dickey and Fulle (1981)
Z( a*) a = 1 in equa ion (1) Fulle (1976)
Z( a*) a = 1 in equa ion (1) Fulle (1976)
(/i,a) = (0,1) in eq. (1) Dickey and Fulle (1981)
We ha e examined whe he he ollowing a iables a e s a iona y: eal
Ml and M3, he in e es a e and eal GDP. In able 2 he ou comes o he
uni oo s es s a e shown o he sample pe iod 1960.1 - 1989.2. The i s
hal o he able shows ha we canno ejec he null hypo hesis o a uni
oo o he le els o all se ies when we use equa ion 2. Howe e , he s a is ic
Z(02) is no signi ican o eal Ml and he in e es a e. As explained
abo e, his sugges s ha equa ion (1) may be a mo e app op ia e ep esen a-
ion o hese se ies. The lowe pa o able 2 p esen s he ele an es s
s a is ics. Once again, he null hypo hesis canno be ejec ed.
We ha e also pe o med uni oo es s on he i s di e ences o all a i-
ables. Table 3 p esen he es ing ou comes. All es -s a is ics a e signi ican
a he
1
% le el, so ha we conclude ha all a iable a e in eg a ed o deg ee
one.
9 Fo example, he es s a is ic Z(a*) is compu ed om:
T
Z(a*) = T(a* -
1)
- 1/2 (S -
S )
[T~2 2 (V -i-y-i)2]-1
= 2
wi h al e na i e lag pa ame e /whe e
T / T
S = T"1 E u + 2T"1E S u u%-Tl = 1,2,...
=
l =l
= +1
T
and S = T"1 2 u .
= 2
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Financial De egula ion in Aus alia 325
Table 2: Tes ing o S a iona i y o Le els o Mac oeconomic Va iables
in Aus alia, 1960.1 - 1989.2
Tes s based on equa ion (2)
Ml MZ
1 4 10 16 1 4 10 16
Z(&) -11.45 -15.99 -12.30 -11.06 -3.45 -5.24 -5.23 -5.47
Z{ ~) -2.42 -2.85 -2.50 -2.38 -1.08 -1.41 -1.41 -1.45
3.09 4.18 3.29 3.0 0.72 1.10 1.10 1.15
Z(*2) 2.49 3.09 2.59 2.45 9.31° 7.26° 7.27° 7.08°
GDP In e es a e
1 4 10 16 1 4 10 16
Z( a) -8.79 -7.23 -6.94 -7.14 -15.06 -18.21 -13.53 -9.51
-2.23 -2.06 -2.02 -2.04 -2.85 -3.11 -2.71 -2.32
3) 2.63 2.29 2.23 2.27 4.16 4.93 3.80 2.86
Z(* 2) 8.67° 10.20° 10.58c 10.31° 3.54 3.91 3.39 3.17
Tes s based on equa ion (1)
Ml In e es a e
lags 1 4 10 16 1 4 10 16
Z( a) -1.97 -3.26 -1.77 -1.17 -0.98 -1.32 -0.52 0.09
Zi e?) -0.75 -1.05 -0.69 -0.51 -0.48 -0.60 -0.29 0.06
Z(* 1) 0.84 0.61 0.88 0.95 1.23 1.09 1.45 1.89
C i ical alues 10% 5% 2.5% 1%
Z{&) -18.3 -21.8 -25.1 -29.5
Z( a) -3.12 -3.41 -3.66 -3.96
Z{**) 5.34 6.25 7.17 8.27
Z(* 2) 4.03 4.68 5.31 6.09
Z( a*) -11.3 -14.1 -16.9 -20.7
Z( c?) -2.57 -2.86 -3.12 -3.43
Z(* 1) 3.78 4.59 5.38 6.43
a Signi ican a he 10% le el.
Signi ican a he 5% le el.
c Signi ican a he 1% le el.
22*
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326 Jakob de Haan and Dick Zelho s
Table 3: Tes ing o S a iona i y o Fi s Di e ences o Mac oeconomic Va iables
in Aus alia, 1960.1 - 1989.2
Tes s based on equa ion (2)a
Ml M3
1 4 10 16 1 4 10 16
Z(cc) -85.78 -96.32 -72.53 -64.55 -77.73 -8.88 -81.33 -82.72
Z( Z) -8.41 -8.61 -8.23 -8.22 -7.41 -7.61 -7.51 -7.55
3) 34.36 36.24 32.59 32.15 26.77 28.36 27.56 27.88
22.91 24.16 21.72 21.43 17.88 18.94 18.41 18.62
GDP In e es a e
1 4 10 16 1 4 10 16
Z(&) -127.9 -111.5 -99.7 -94.3 -106.0 -111.4 -88.7 -71.3
-12.2 -12.7 -13.6 -14.4 -9.85 -9.90 -9.84 -10.5
72.5 77.8 88.9 99.1 47.27 47.87 46.67 51.67
Z(*2) 48.3 51.9 59.3 66.1 31.51 31.91 31.12 34.45
a Since all s a is ics a e signi ican a he
1
% le el, he signi icance le els a e no
shown in he able.
We ha e also examined he s a iona i y o he se ies o e he pe iod
1960.1 - 1983.4. Fo his pe iod he same conclusions wi h ega d o s a io-
na i y o he da a we e eached and he esul s a e, he e o e, no shown.
As we ha e a gued in he p e ious sec ion, es ing o he exis ence o a
long- un ela ionship be ween a iables ha a e non-s a iona y implies
es ima ing an OLS eg ession o he ollowing o m:
(3) Mi =
Po +
l3iY
+
p2
+
e ,
whe e M is he log o he eal money s ock, Y deno es he log o eal GDP,
is he in e es a e, while i = 1,3. I he esiduals om his eg ession - which
is w i en in i s mos gene al speci ica ion - a e s a iona y, he a iables a e
coin eg a ed. We ha e es ed o coin eg a ion using he Za and Z a s a is ics
o Phillips (1987). C i ical alues o he s a is ics a e abula ed in Phillips
and Oulia is (1990). In ow 1 o able 4 he esul s o he coin eg a ion es s
o he model ep esen ed by equa ion (3) wi h Ml a e shown. Fo he pe iod
1960.1 - 1989.2 we canno ejec he hypo hesis ha Ml is no coin eg a ed
wi h eal GDP and he in e es a e. (Only wi h a unca ion pa ame e o 4,
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