On asymmetric costs of disequilibrium and forecasting money demand

The assumption of asymmetric costs of disequilibrium in money demand leads to data partitioning into situations of binding money demand and surplus money balances. It is found that joint fitting of equations to this data division (for 1952:i–1973:iv) leads to reduction in SSE and to forecasts that are superior to those obtained from a corresponding single equation. The primary reason for the improvement is probably the flexibility allowed by the allocation of observations between situations of positive and negative excess demand.