Abstract
This paper investigates the issue of whether financial liberalization in Korea has caused the demand function for money to be unstable. Unlike the previous evidence, we show that the stability of money demand function has not been changed by a series of financial reform measures over the sample period. Since the reliability of this finding depends on the statistical validity and appropriate interpretation of the underlying model, we extensively examine the statistical properties of the baseline model by applying various empirical tests, with particular attention to issues of invariance and observational equivalence. The results of the tests show that the estimated ECM model is uniquely interpreted as a backward-looking model and is also invariant to shifts in regime and various reforms in government policy.
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