Evaluating structural relations between money demand and its determinants

Abstract

The relationship between money demand and specific macroeconomic predictors has been explained by a number of money demand theories. Panel structural vector autoregressive (SVAR) and generalized autoregressive conditional heteroskedasticity (GARCH) techniques were deployed to analyze the data on money demand with lag adjustment in relation to inflation uncertainty, interest rate variations, household consumption, and exchange rate depreciation in Africa. The study which covers 30 African nations discovered a two way relationship between money demand and price level variation. While higher prices would increase demand for money, the same demand also influences changes in a nation’s price level, such that in the long run, inflation would result from more money held by economic units. With a standard deviation of 5.51, Guinea had the most erratic money demand, followed by Sierra Leone at 5.29. A variance of inflation uncertainty ranged from 9.45 percent to an extremely high proportion for Congo. Exchange rate devaluation is found to be considerably impactful in determining money demand. Results show that as more of the units of the local currency is used to exchange a unit of foreign currency such as the dollar, local economic units are discouraged to increase demand for money in local money and thus hold fewer local currencies while investing in foreign exchange investments