STABILITY OF MONEY DEMAND IN SIERRA LEONE USING AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) APPROACH 1980 – 2018

Abstract

<p>This work seeks to investigate whether money demand is stable in Sierra Leone. The study uses annual data for the period 1980 to 2018. A standard money demand is defined and estimated using the Autoregressive Distributed Lag (ARDL) approach. This technique permits error correction modeling to examine the short and long-run relationship between money demand and its determinants. The determinants of money demand (MD) are Real Gross Domestic Product GDP(Y) Real Exchange Rate (RER), Real Interest rate (RIR), GDP Deflator used as a proxy for inflation rate were empirically examined to determine their relative statistical significance as they affect money demand. In advance of adopting the ARDL Approach, the time series properties of the variables in the model were examined using the ADF and PP tests. All variable was found to be I(1) - stationary at the first difference, therefore the use of ADRL Approach is suitable and ideal. The model used in this study has passed all of the diagnostic tests – specification, serial correlation, heteroscedasticity, and structural stability. Hence the estimated model cannot be spurious. Therefore, these results are not misleading, rather they are reliable. The test of stability was done using CUSUM and CUSUMSQ plots, and both suggest that there exists a stable relationship between real broad money demand in Sierra Leone and its determinants.</p><p><strong> </strong></p><p><strong>JEL:</strong> E61, E62, P35</p>