Abstract
The paper tests the null hypothesis of a stable long-run money demand in South Africa over the period 1970-2013. We employ the Gregory-Hansen (GH) method to test for the possibility of structural breaks in the money demand function. The Johansen Maximum likelihood procedure is carried out to determine the cointegration vector from which existence of one cointegrating vector is supported. Also based on the GH criterion, there is existence of one cointegrating vector. GH proposes three structural breaks for the money demand function. Results suggest that endogenous breaks occurred in 1991 and 1994. The GH cointegration equations reject M1 whilst M2 and M3 pass and we proceed to estimate the error-correction model. Complemented by the CUSUM and CUSUM of squares, the tests carried out suggest that monetary policy shifts did not introduce instability.
Highlights
The money demand function is crucial in the conduct of monetary policy in many economies in the world
The study attempted to determine the existence of long-run equilibrium money demand function in South Africa over the period 1970-2013
The study was informed by the fact that South Africa underwent structural changes over the past three decades including the relaxation of exchange controls in the economy
Summary
The money demand function is crucial in the conduct of monetary policy in many economies in the world One such important application is in the alignment of money supply consistent with targets in real economic growth and inflation (Wesso, 2002). It merits the case to test for stability in money demand post financial innovation and as well test as to whether there was a structural change. This comes a time when interest rates have been at record low post global financial crisis. A question to reflect on will be; is the money demand function still stable? This allows us to gauge the feasibility of price stability objective as the case in South Africa
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
