Long-run money demand revisited: evidence from a non-linear approach

In this paper we argue that employing the conventional linear cointegration approach in examining long-run money demand may not be appropriate after taking into account the existence of transaction costs. We provide evidence to show that deviations from equilibrium money demand follow an exponential smooth transition autoregressive process that is mean-reverting outside a given range and has a unit-root inside the range. Our findings also provide an alternative explanation for the failure of much of the existing literature to support a long-run money demand function.