Money Demand in Venezuela: Multiple Cycle Extraction in a Cointegration Framework

Money demand in Venezuela is modeled using structural time series and error correction approaches, for the period 1993.1 to 2001.4. The preferred model features seasonal cointegration and was estimated following a structural time series approach. There are similarities in the long-run behavior of money demand associated with the structural time series and error correction approaches. Estimated shortrun dynamics are more fragile, with the structural time series modeling approach providing richer insights into the adjustment dynamics of money demand. A cycle with a 3-year period has been found to be common to money demand, real GDP and opportunity cost variables. This cycle is robust to changes in model specification, including choice of opportunity cost variable. Higher frequency cycles are also found to exist but are more sensitive to model specification. Results are also presented for a combined approach that takes advantage of error correction models as well as the type of insights into short-run dynamics afforded by the structural time series modeling approach. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.