Money Demand and Inflation: A Cointegration Analysis for Canada

The aim of this paper is to investigate the presence of long-run equilibrium relationships among variables that explain money demand in Canada during the period 1983–2011. To this end, I set up a vector-error correction model with an appropriate lag order and test for cointegration by means of the Bartlett corrected trace test. I estimate the long-run money demand parameters by means of the maximum likelihood method of Johansen, comparing an unconstrained benchmark model against other constrained model. I find the latter to not be better than the benchmark one. Finally, I perform sensitivity analysis and check the stability of the resulting cointegration relationships.