Asymmetrical effects of real exchange rate on the money demand in Saudi Arabia: A non-linear ARDL approach.

Haider Mahmood,Tarek Tawfik Yousef Alkhateeb,Fenghua Wen

doi:10.1371/journal.pone.0207598

Haider Mahmood, Tarek Tawfik Yousef Alkhateeb + Show 1 more

Open Access

https://doi.org/10.1371/journal.pone.0207598

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Abstract

This present research investigates the money demand function of Saudi Arabia using a long period 1968–2016. In addition, the asymmetrical effects of real exchange rate changes have also been explored in the estimated money demand function. Our empirical results suggest that income and inflation have positive and negative effects on money demand respectively. Further, a real appreciation of US dollar has a positive effect but a real depreciation has a negative effect on the money demand. Furthermore, income and price homogeneity hypotheses do not hold for the estimated elasticities. Moreover, the estimated model is found stable with the theoretically expected effects of money demand’s determinants. Therefore, we are suggesting money supply as a monetary policy instrument to the economy of Saudi Arabia.

Highlights

An estimation of Money Demand Function (MDF) carries a prime importance in the macroeconomic literature
A stable MDF can be claimed and money supply as an instrument of monetary policy may be recommended to the economy of Saudi Arabia as suggested by Poole [1]
The effects of income, inflation and Real Exchange Rate (RER) have been tested on the demand for Saudi Arabian Riyals (SAR) in Saudi Arabia using a non-linear Auto-Regressive Distributive Lag (ARDL) model and using a long time period 1968–2016

Summary

Introduction

An estimation of Money Demand Function (MDF) carries a prime importance in the macroeconomic literature. Afterwards, a mass of literature has tested and reported the significant and insignificant effects of exchange rate on the money demand. Using data sets of different countries, some studies have corroborated that asymmetrical effects of exchange rate have been proved significant which was found insignificant by past literature in the symmetrical settings. These studies have reported a stable MDF after including asymmetrical effects of exchange rate [5,6,7,8].

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