Accessing nonlinear money demand function in determining the inflation threshold

Abstract

The objective of this study is to determine the level of inflation via the nonlinear money demand function. The study will give a threshold point at which the households and businesses started to consider official inflation in making decisions. This study used Terasvirta’s method. Modeling of economic relations with smooth transition regression models. Verification procedures linearity, the defects of the model and model editing of money demand function for the nonlinear capabilities of smooth transition regression (STR) are used. We discovered that there exists a critical threshold from which inflation affects real money demand in Vietnam during the study period. That rate is around 5.56%. The high inflation and low inflation processes are completely different, therefore, nonlinearity of money demand model is very clear.