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.
The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.