The portuguese demand for money function

As of the mid 1970’s, estimation of money demand functions for the U.S. and other developed countries has shown symptoms of misbehavior of the relationship. In particular, some doubts have appeared about the theoretical foundations of the widely used Chow real partial adjustment hypothesis. Also, some other authors have pointed out the likely inappropriateness of the conventional closed economy specification. Using annual data from 1960 to 1983, it was found that the foreign opportunity cost variables did not play a relevant role in the explanation of the long-run demand for money in Portugal. Using quarterly data for that same period, three alternative short-run specifications were compared. The tests reported suggest that the use of a partial nominal adjustment hypothesis is more appropriate. Finally, the use of the cusum of squares test suggests that the demand for M1 and M2 have been stable over that period.