Abstract
Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.
Highlights
To adopt an effective monetary policy, it is essential to understand the characteristics of money market, the money demand function
This paper investigates the long run demand for money and short-run dynamics associated with the long-run money demand function for Sri Lanka during the post liberalisation period and reports on the estimates of a money demand function for Sri Lanka
We have examined in this paper the long-run demand for money and the short-run dynamics in Sri Lanka during the post liberalisation period
Summary
To adopt an effective monetary policy, it is essential to understand the characteristics of money market, the money demand function. The significant developments during the last several years, such as the floating of the exchange rate and the implementation of the active market operations system, warrant a fresh study of the demand for money in Sri Lanka. We need to examine the alternative interest rates to identify the best proxy for the opportunity cost of holding money In addition to these variables, some argue that the depreciation of the domestic currency influence the demand for money (Arango and Nadiri,1981). Commercial bank’s one year fixed deposit rate is a significant determinant which has been considered in this study as the opportunity cost of holding money.
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