A smooth transition regression equation of the demand for UK M0

The econometric analysis of UK M0 has, so far, been confined to linear models. Using quarterly data over the period 1970:4-1997:2 in a single-equation money demand system, this article shows that a linear error-correction equation of the demand for UK M0 contains significant non-linearity and parameter non-constancy of smooth transition regression (STR) type. A constant-parameter exponential STR (ESTR) equation is then estimated, suggesting that interest rate changes have been an important factor in explaining fluctuations in the demand for UK M0.