Abstract
In this study, we employed annual time series data of Ghana from 1982 to 2019 to examine the long-run money demand function and its stability. Through the methods of co-integration, Vector Error Correction Model, Auto-regressive Distributed Lag bounds test, CUSUM test (cumulative sum of the recursive residuals) and CUSUM sq test (cumulative sum squared of the recursive residuals) we established total stability and long-run relationship between money demand function and its determining factors. Accordingly, our key recommendation is for monetary policymakers to improve on their supervision and monitoring role in the financial market and institutions to avert failures within the sector such as what happened beginning 2014 with the proliferation of several Ponzi-schemes. Monitoring and supervision are key to the maintenance of confidence and stability in the monetary system.
Highlights
The subject of examining the total amount of money and its stability in an economy has been of significant interest to many researchers for many decades if not centuries
In this study we explored the stability of the long-run and short-run money demand functions of Ghana from 1982 to 2019 using co-integration, autoregressive distributed lag (ARDL) bounds test and a vector error correction model (VECM)
The results from both the auto-regressive distributed lag model (ARDL) bounds test and VECM confirm the presence of long-run and short-run relationship between money demand and its determinants
Summary
The subject of examining the total amount of money and its stability in an economy has been of significant interest to many researchers for many decades if not centuries. The essence is to understand how changes in the quantity of money supply by monetary authorities (central bank) are affected or related to changes in both domestic and foreign interest rates, the general price level (inflation), exchange rates and income or output levels in an economy Much of this interest in the quantity theory of money and stability was inspired by the novel work of Keynes (1936) on the General Theory of Employment, Interest. The study of the money demand function and its determinants is important to measure its stability, volatility and capture the effects of international movement of asset prices; economists have been innovative at designing functions that encapsulate all these fundamentals These determinants include the real domestic income, inflation, exchange rate to capture the effects of the dynamics in the country’s currency against other currencies, foreign interest rate to capture the effects of international financial assets and the domestic interest rate. In this study we test for the stability of money demand function and its determinants (including foreign interest rate) using annual time series data from 1982 to 2019
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