German unification and the demand for German M3

This paper estimates a demand equation for German M3 over the period 1971:1-1989:4, and studies its ability to predict all-German M3 during 1990:l-1992:4 and (a measure of) western German M3 during 1990:l-1994:l. Although the out-of-sample prediction errors appear serially correlated, the equation passes stability tests for the western German data until 1993:4, but rejects in 1994:1. The model fails stability tests for the all-German data, largely because the jump in the money stock at unification is larger than that in nominal GDP. A slight modification of the model estimated using data for the period up to 1990:4 predicts all- German M3 very well in the period 1991:l-1992:4.