The Economic Uncertainty with Money Demand: Empirical Evidence for Selected Developed and Developing Countries

Abstract

An important element of the empirical research on demand for money is that many published papers focus on common issues of economic activity rather than on economic uncertainty to identify a stable money demand function. Therefore, by encompassing economic uncertainty in money demand study cannot be used to disprove its precision simply because of model misspecification in general use and an intricate process of data collection. This paper uses a sample of four selected developed countries and five selected developing countries. By using the dynamic heterogeneous panel co-integration test of autoregressive distributed lag, this paper examines the money demand relationship that considering economic uncertainty and two additional control variables, namely exchange rate and inflation. The paper’s findings suggest that the economic uncertainty is an important explanatory indicator about unknown economic events that may assist in fine-tuning money demand stability, and that the exchange rate and the inflation rate roles as well as the income and the interest rate roles remain significant in the process of central bank’s monetary decision making, which eventually help to enhance money demand controls for a sensible monetary transmission mechanism.