Investigating long-run demand for broad money in the Gulf Arab countries

Abstract

We estimate the long-run demand for broad money for the six Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) over the 1980–2012 period. Applying time series and panel econometric tests, we first document the existence of long-run equilibrium relationship for money demand – both nationally and regionally. The estimated income elasticities are generally lower than those reported in the literature, while the interest elasticities are more in line with the standard money demand literature. We discuss how the movements in income velocity can reconcile the varying income and interest elasticities documented across the six countries. A discussion on the homogeneity (poolability) of the long-run money demand parameters and the error correction model of money demand is also provided.