Money Demand Function Research Articles

Determinants of Money Demand: An Empirical Examination

Tremendous changes have been witnessed in the developing countries' macroeconomic landscape over the past few decades. For instance, several forms of financial innovations have been witnessed in the sub-Saharan African region over the past decades. These changes can shift various parameters of the money demand model and function. However, few empirical studies have been carried out in this scope in East Africa. It is against this backdrop that this study will employ the panel estimation technique to analyse the major determinants for money demand in East Africa for the period 2007 to 2020. The study will consider mobile money transactions, ATMs, inflation, interest rates and economic growth variables. The result of the pooled ordinary least squares estimator has identified mobile money, ATMs, and economic growth has a positive influence on money demand while interest rates negatively influence the money demand function. The result has identified the role of monetary authorities and policymakers in controlling use of mobile money, ATMs, income and interest rates to grow money demand in East African economies.

Re-examining money demand function for South Asian economies

This study explores the stability of the money demand function in South Asia using the cash-in-advance theory of cointegrated monetary predictors. Due to the stationarity of the variables, the study employs CS-ARDL (cross-sectional augmented autoregressive distributed lags), and the ARDL models for panel and country-specific analysis, respectively. The short- and long-term elasticities disclose robust and significant statistical evidence of a nexus between the real monetary aggregate and the predictors, in the panel and across South Asia. The findings also reveal that real income, the real exchange rate, and foreign interest rates positively influence the real monetary aggregate, whereas the domestic interest rate and the inflation rate have contractionary effects. Besides, the results indicate that the money demand function is stable in Bangladesh, Bhutan, India, Pakistan, and the Maldives, while the findings support only partial stability in Afghanistan, Nepal, and Sri Lanka. The findings suggest that South Asian countries make significant allowance for the vital substitutional effects of currency on domestic holdings when articulating monetary policies. It also suggests that South Asian countries may need to build stronger coordination with respect to their monetary attempts as a “regional bloc” rather than autonomous monetary policies.

Consumer preferences, the demand for Divisia money, and the welfare costs of inflation

This paper uses neoclassical demand theory to calculate the welfare costs of inflation. It considers the demand interactions between money, consumption goods, and leisure, relaxes the assumption of fixed consumer preferences, and addresses the inter-related problems of estimation of money demand functions, instability of money demand relations, and monetary aggregation. It makes full use of the relevant economic theory and econometrics and generates inference in terms of long-run welfare costs of inflation that is internally consistent with the data and models used.

International currency substitution and the demand for money in the euro area

Using quarterly data for the period from 1983:Q1 until 2019:Q4, we identify a stable money demand relationship for the euro area M3, with the US long-term interest rate as a regressor, together with the domestic interest rate and income. This specification is consistent with the open economy liquidity services approach to money demand, in light of which the ownership of money is separate from portfolio decisions. Our results suggest international currency substitution, pointing to interdependency of monetary policies, even in a context of floating exchange rates. In the short-run analysis, we find that excess liquidity helps predict nominal money but not the price level. In general, our findings cast doubt on the usefulness of the information content of M3 to analyse prospective inflation in the euro area. • Using quarterly data, we identify a stable money demand function for the EA M3. • We find a significant influence of the US interest rate on the EA money demand. • Results point to interdependency of monetary policies, even under float. • We find that excess liquidity helps predict nominal money, but not the price level. • Our evidence casts doubt on the usefulness of M3 to analyse prospective inflation.

Constructing Divisia Monetary Aggregates for Nigeria

This study computes Divisia monetary aggregates DM1, DM2, and DM3 for Nigeria using the Tornqvist-Theil quantity index for the period 2007M12 to 2020M12 and evaluates the performance of the higher-order aggregate (DM3) with a corresponding higher aggregate of the simple sum broad money supply (M3). Applying the indicators to money demand function the results showed that DM3 performed better than the matching simple sum measure M3 due to its faster convergence rate. This is because the Divisia aggregates contain additional information in the form of user-costs and spending shares that are not considered in the compilation of the traditional measure, information that may be important for the proper execution of monetary policy. It is therefore, recommended that the Divisia broad money index be used as complement to the simple sum broad money supply for policy decisions.

Money Demand in Indonesia: Does Economic Uncertainty Matter?

Since the global financial crisis of 2008, there has been a rise in economic uncertainty and money demand research. The money demand is vital in monetary policy, which has implications for the regional economy. This study aims to analyse the money demand in Indonesia in the middle of global economic uncertainty, as well as the contribution of the study, which includes the economic and monetary policy uncertainty in a separate model for an enhanced money demand function. The study used a structural vector autoregressive (SVAR) approach. The results indicate that monetary demand is negatively affected by economic uncertainty. With the development of the financial sector, the impact of economic uncertainty and the unpredictability of US monetary policy drives people to be more cautious, resulting in a movement of "wealth" to other instruments. The current study implies that the monetary policy in the form of interest rates as the response to the global condition should consider monetary aggregates in terms of money demand as a precautionary measure to maintain money demand. The study revealed that stable money demand suggests inflation targeting as a monetary policy that can enhance monetary policy in the face of rising economic uncertainty.

An Estimation of Money Demand Function Using Nigerian Data: Implication for Monetary Policy

This study estimated Nigeria's Keynesian and augmented money demand function using time series variables from 1986 through 2021. The Keynesian money demand function is estimated by considering income and interest rates as the determinants of the money demand function. In contrast, the augmented money demand function incorporates critical variables like exchange rate, income, and interest rates. With the Robust Ordinary Least Squares estimation method, the income level exerted a positive and significant effect on money demand, while interest rate put forth a negative but insignificant impact. The a priori signs of these two variables align with the Keynesian postulation that income directly correlates with the actual money demand function. At the same time, the rate of interest has an inverse relationship. Further findings from the augmented money demand function, as reported by the autoregressive distributed lag short-run estimates, indicate that the price level and exchange rate directly and significantly affect Nigeria's current money demand function. The money demand function so estimated was reported to be stable, given the cumulative sum of squares result. A general conclusion that can be drawn from the findings is that the money demand function is income elastic but inelastic regarding interest rate, price level, and exchange rate.

Divisia monetary aggregates for Russia: Money demand, GDP nowcasting and the price puzzle

The lack of developed financial markets and well-functioning transmission channels assigns monetary aggregates in emerging economies the potential role of nominal anchor, intermediate target, or informational variable for monetary policy. The effectiveness of this approach relies crucially on the correct measurement of money, which is not fulfilled by the conventional index based on the simple sum of financial assets. This paper calculates alternative Divisia monetary aggregates for Russia over the period 1998–2019, which account for the level of liquidity of a given monetary asset by assigning weights according to the usefulness of that asset for transaction services. Divisia is found to follow a markedly different growth pattern from the simple sum, whereby deviations between the two series are even more pronounced when foreign currency accounts are included. We conduct three empirical exercises to demonstrate the advantages of Divisia over the simple sum. Divisia confirms the stability of the money demand function and reflects portfolio shifts in response to changes in the opportunity cost of money. Divisia-based GDP nowcasting performs better in times of financial turmoil than the simple sum. Lastly, Divisia mitigates the price puzzle phenomenon relative to the conventional measure. We conclude that Divisia monetary aggregates would improve the effectiveness of monetary policy in Russia.

STRUCTURAL BREAKS DAN KETIDAKSTABILAN PERMINTAAN UANG DI INDONESIA

This research aims to identify the sources of instability of the money demand function (M1 and M2) due to structural changes that occur as a result of economic shocks. These shocks are technically shown by the presence of structural breaks in the data and can lead the parameters non-constancy. The instability of the money demand function was analyzed using the Gregory and Hansen test. The source of instability of the money demand was identified using time varying parameter model. This research used quarterly time series data from 1993Q1 to 2013Q4. The results show that the money demand function (M1 dan M2) is not cointegrated (unstable) and the source of the instability is exchange rate variable.

Revisit of Tunisia’s Money Demand Function: What About Oil Price and Exchange Rate Effects?

This paper examines the long run and short run dynamic relationship between real broad money and macroeconomic factors in Tunisia for the period 2010M01 to 2019M07. We employ linear and NARDL bound testing approach for co-integration between the money demand measure and its determinants. Three real broader money demand variables (M2, M3, and M4) are considered to show that exchange rate have asymmetric significant effects once we introduce nonlinearity in the long run as well as in the short run association. Then, by using the (Shin et al., 2014) NARDL approach, we show that currency appreciation and depreciation could affect the demand for money in an asymmetric manner. However, in the long run, it is only the oil price and Tunisian Dinar (TD) depreciation and appreciation which have significant effect out of the five considered macroeconomic factors (real income, interest rates, inflation, oil price, and the exchange rate). Besides, the QSUMSQ stability tests results reveal that only real M3 money demand function which is clearly stable. In implementing monetary policy, the Tunisian central bank (TCB) should target the M3 monetary aggregate and take into account of the exchange rate changes stabilization.

Determinants of Real Money Demand in India.

The foundation of a nation's monetary policy is determined by the components of its money supply. The advent of technological advancements in the banking industry has led to the development of digital payment methods that serve as substitutes for the currency in circulation. The proliferation of digital payment methods has an impact on real money demand, thereby disturbing the money supply-demand equilibrium of the country. The current study made an effort to evaluate the factors that affect the real money demand in India, taking into account the use of digital payment methods like NEFT, debit cards, and credit cards, as well as macroeconomic variables like GDP, the exchange rate, and price level. The study used secondary time series data from the RBI database for the period from 2005–06 to 2020–21. The linear regression model was used to estimate the real money demand function, and it was found that income, exchange rate, and NEFT transactions positively influenced real money demand. Debit cards had a negative impact on the real money demand, concluding that an increase in the value of debit card transactions caused a decline in the real money demand. The study’s findings will help the RBI to enable methods to incorporate digital payment instruments in the components of the money supply, thereby maintaining a stable money demand function.

Exploring the Stability of Money Demand Function for GCC Countries

It is imperative to explore the stability of the money demand function (MDF) due to its effectiveness in the strength of monetary policy. This paper employs the ARDL approach to examine whether the M3 MDF is stable for the Gulf Cooperation Council (GCC) consisting of six Arabian Gulf countries. The paper also uses CUSUMSQ and CUSUM tests for this purpose. Unit root test results indicate that variables have unit roots with varying degrees. The results reveal that M3 has a cointegration relation with inflation and real output, however, the interest rate is statistically insignificant for most countries across the period under study. However, the CUSUM and CUSUMSQ tests indicate that M3 MDF is unstable across all the GCC countries. It implies that the governments in GCC countries have to be very careful in implementing monetary policy to achieve stability and growth targets.

Financial innovation and the stability of money demand in Nigeria

AbstractStudies that explore the relationship between financial innovation and the stability of money demand in Africa use the indirect measure of financial innovation. Previous studies on Nigeria also ignored total monetary aggregates (M3), despite its importance to monetary policy formulation and liquidity management. This paper contributes to the existing literature in two ways; first, we expand the generic money demand function to include the direct measure of financial innovation. Second, we test the model on Nigeria using a broader definition of money demand—narrow money (M1), broad money (M2) and total monetary aggregates (M3). We employ the Pesaran et al. (2001) autoregressive distributed lag (ARDL) bounds test approach to cointegration in estimating the respective equations and find evidence of a long‐run relationship between money demand and financial innovation. The CUSUM and CUSUM‐of‐Squares tests reveal stable money demand across the three measures of money demand, which indicates that the inclusion of financial innovation has not altered the long‐run stability of money demand in Nigeria.

Long-Run Stability of Money Demand and Monetary Policy: The Case of South Korea

The current paper aims to investigate the stability of money demand in the case of Korea. Since the economic reforms in Korea faced considerable structural changes, it was difficult to formulate a stable money demand function. The use of unit root and cointegration tests with structural breaks suggest that economic and financial deregulations have influenced the stability of money demand. The cointegration results suggest a cointegration vector in all models, implying a long-run relationship. Furthermore, the estimated long-run equations show that the elasticity of long-run industrial production to real money is positive and very close to one. Finally, the exogeneity test shows a long-run, one-way, causal relationship from industrial production to M1 and a bi-directional causality between M1 and interest rate in both models. In the case of M3, there are long-run, one-way, causal relationships from industrial production and interest rate to M3 in both models.

Rethinking money demand function in Nigeria using Toda-Yamamoto Approach

This study examined the demand for money in Nigeria from 1980 to 2019, employing various techniques of econometric analysis. The study was motivated to determine whether Keynes liquidity preference theory holds in Nigeria and to ascertain whether money demand function is stable in Nigeria. The Augmented Dickey Fuller (ADF) unit root test showed that the variables were stationary at different levels. The test of stability showed that the estimated parameters for the study are stable within the period under study. Thus, money demand function is stable in Nigeria. Considering a year period lag in the estimated money demand function, it was found that there was a positive relationship between money demand and real income during the period of study. It implies that increase in real income (gross domestic product) leads to increase in the demand for money, as predicted by economic theory. The real income (gross domestic product) coefficient is 0.09 which is less than unit and is consistent with the transactions and precautionary theories. However, the inflation rate both at a year and two years period lags had negative signs, and were consistent with a priori expectations. The coefficient of –0.002 and -0.001 respectively showed that the demand for money in Nigeria will decrease by about 0.2% or 0.1% when the inflation rate (at a year or two year lag) rises by 1%. The result indicated that the higher the rate of expected inflation (i.e. higher returns on the alternative assets), ceteris paribus, and the lower is the demand for money in Nigeria. Hence, people would tend to switch to other money alternatives when inflation is anticipated, because they promise higher rates of returns. In the light of the findings, it was recommended that Central Bank of Nigeria should pursue policy aimed at changing the level of income which will influence the demand for money in the same direction.

Determinants of corporate cash holdings: An application of a robust variable selection technique

US firm cash holdings have become increasingly concentrated over time withering shareholder returns and heightening agency problems associated with free cash flows. We investigate the determinants of corporate cash holdings using a robust regression technique (the Least Absolute Deviation Regression, LAD) and a state-of-the-art variable selection procedure (The Least Absolute Shrinkage and Selection Operator, LASSO). This framework identifies a sparse model which is also resistant to outliers. We obtain several results. First, the median absolute errors of the LAD-LASSOselected variables is significantly lower than the corresponding values of the basic determinants commonly used in the literature, in both in-sample and out-of-sample schemes. Second, financial leverage is a key determinant of cash holdings, indicating that cash and debt policies are tightly related (debt-cash substitutability). Third, none of the corporate governance proxies identified in the literature as a corporate cash holding determinant (managerial ownership, board independence, CEO duality, board size, and institutional ownership) is selected by the LAD-LASSO method, challenging the potency of governance mechanism in corporate cash management. Fourth, the financial crisis of 2008 dramatically changed the selected predictors for cash holdings as well as requiring additional predictors for the period, though their number was heavily curtailed after the period. Fifth, the money demand function is different between financially constrained and unconstrained firms, in both combination and number of influential variables. Finally, prediction error of the LAD-LASSO-based cash model is smaller than that of the principal components regression in both in-sample and out-ofsample prediction. Our findings are of importance to corporate cash managers, shareholders, monetary policy authorities, and scholars on the issues such as adjustment speed of cash holdings and valuation of excess cash reserves, which are based on the fitted values from the cash model.

Money Demand Function: A Not-So-Fond Farewell in the Light of Financial Development

This study investigates the stability issues of real money balances considering financial development. We estimate real narrow (M1) and broad (M3) money demand in India during the post-financial reform, from 1996:Q2 to 2016:Q3. To check the short- and long-run relationships, this study uses the autoregressive distributed lag model of cointegration and other various time series techniques. After incorporating financial development into money demand, we determined short- and long-run relationships and a well-defined open-economy stable money demand specification (M1 and M3) in India. Having established money demand function, the policymaker and central bankers can use monetary aggregates as an indicator or information variable to predict output gaps and inflationary expectations under the inflation-targeting framework.

The Determinants and Stability of Demand for Money: The Case of Azerbaijan

The main purpose of this study is to ascertain the determinants of demand for money and its stability in Azerbaijan using monthly time series data spanning from January 2006 to November 2020. Johansen cointegration, vector error correction model (VECM) and Impulse Response Function were employed to investigate the relationship between real money demand (M1), and macroeconomic variables, namely income, inflation, interest rate and exchange rate. CUSUM and CUSUMSQ stability tests were applied to check whether the money demand function was stable during the observed period. The results of Johansen cointegration reveal a long-run relationship between mentioned variables. Consistent with money demand theory, the VECM results show that the demand for real money balances is positively related to income but it responds inversely to inflation, interest rate and exchange rate. Impulse Response Function confirms the result of VECM. Moreover, after incorporating the stability tests, the empirical results show that real money demand function is stable over the observed period, suggesting possible use of the narrow money aggregate as a target of monetary policy in Azerbaijan.

Monetary overhang in times of covid: evidence from the euro area

ABSTRACT This paper investigates the determinants of the monetary overhang in the euro area since the outbreak of covid-19. To this end, we estimate a long-run panel money demand function for 18 euro area countries over the period from 2003 to 2019. We calculate the monetary overhang since 2020 as the difference between the actual money stock and the value implied by the money demand function. Making use of cross-sectional heterogeneity and time variation in government responses to covid-19, we relate the monetary overhang to covid-19 response indicators, as well as to confidence indicators. We find that the monetary overhang is significantly related to the level of economic support, the stringency of the containment policy and the economic sentiment indicator.

Денежное предложение в истории макроэкономической мысли: 50 оттенков эндогенности

The paper considers the evolution of the money supply concept in economics through the lens of contemporary discussion on the degree of its endogeneity. It is stated that the model of exogenous money supply formation, widespread in the literature and actively criticized in recent decades, is an artifact of macroeconomic thought. Its dominance lasted a very short time period, and various forms of endogeneity were attributed to money supply much more often in the course of monetary theory development. Authors cover the debates between the currency and banking school in the XIX century, the birth of the theory of money multiplier, Keynes’ position, the monetarist view of money supply and its criticism by Post- Keynesians. Particular attention is paid to the turn in views within the mainstream, from the Real Business Cycles doctrine to state-of-the-art models of the New Synthesis. It is emphasized that the complete exogeneity of money supply is a distinctive feature only of the monetarist approach, which has relied on the specifi c assumption of the stability of money demand function. The paper shows that, despite the visible convergence between the New Keynesian and Post- Keynesian positions, based on the modeling of interest rate targeting rather than money supply targeting by the central bank, fundamental differences still remain between two camps regarding the endogeneity mechanism.