Model Stability Test of Money Demand by Monthly Time Series Using CUSUM and MOSUM Tests: Evidence from Turkey

Abstract

The effects of policies are represented by the parameters of the concerning estimated model. As Lucas critique suggests unless the parameters change with respect to policies, the existing policies will be valid in the long-run. However, policy change can be observed at an unknown point and slowly in particular time period, then these policies will not be associated with structural change. In this study, model stability of money demand constituted by monthly time series concerning the periods of 2001:5-2011:3 in Turkey was tested by recursive CUSUM and MOSUM tests. The results of CUSUM and MOSUM tests demonstrated a single-continuous break and two discrete breaks. In this period, slow structural breaks in the model were thought to be caused by the inflation targeting policies, restricted money supply and short-term interest policies of the government.