Testing Superexogeneity: The Demand for Broad Money in the UK.

The paper examines the relevance of the Lucas critique for the demand for broad money (M4) in the UK. The authors adopt the methodology proposed by Engle and Hendry (1989) for testing superexogeneity. After presenting a conditional ECM model for M4, they construct marginal models for three explanatory variables: the own-interest rate, inflation, and wealth. Whilst the data indicates that there have been significant structural breaks in the marginal models due to regime shifts, the parameters of their conditional model seem invariant to these shifts in the generating processes. The apparent refutation of the Lucas critique in this instance is of interest given that a number of recent studies have argued that broad money may be more appropriate as a context for testing forward-looking buffer stock models. Copyright 1992 by Blackwell Publishing Ltd