Determinants of Money Demand in Algeria: An Empirical Study Using Cointegration and Error Correction Model

Abdelkarim Mansouri,Abderrahmane Tahi,Mohammed Djebbouri

doi:10.5539/mas.v13n10p78

Abstract

This investigation aims primarily to estimate the determinants of the demand function of money in its broad sense, in Algeria during the period 1980-2017. To accomplish this study, Cointegration and Error Correction Model (ECM) have been used. Thus, these tests proved the no stationary of time series which led us to apply the cointegration tests, so in the end we estimate the model with error correction. The results of this estimation show that the importance of determinants of money demand in the short and long term are ordered as follows: real income, the velocity of circulation of money (VM2) in the short and long term, the long-term exchange rate; in the short term its importance diminishes in favor of inflation, which has a decisive effect on the demand for money in the short term. The findings reveal that the money demand function is insensitive to the interest rate, which explains why speculation is generally regarded as a less important reason in Algeria.

Highlights

From the perspective of macro - economics, schools of thought differed in the role and effectiveness of money
This study has aimed at estimating the determinants of money demand in Algeria using the cointegration analysis technique and the error correction model, during the period (1980 – 2017)
In the estimation of the determinants of demand for money in Algeria and after several attempts, it has become clear that the variable of income, the velocity of money circulation and the variables of the cost of the alternative opportunity to retain money have been the most appropriate determinants of demand for money as well as their signs are corresponded to the assumptions of economic theory

Summary

Introduction

From the perspective of macro - economics, schools of thought differed in the role and effectiveness of money. A school that marginalizes the role of money and reduces the effects on the course of economic life; another school gives great importance to role but with limits. Another different school regards its significant roles for it changes the biggest role in influencing other economic variables. During the financial development, the role and effectiveness of money become one of the most important economic phenomena. Monetary development becomes one of the most influential fields of economic activity as well. Monetary systems improved from commodity to credit, and to electronic goods, in the sense, from money whose commodity value represents part of its monetary value to money whose commodity value does not represent the importance of determining its monetary value whether it is money issued by central banks or current accounts in the books of commercial banks of electronic money

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Conclusion