Money Demand Model Research Articles

The Janus model of money demand

AbstractWe derive a new theoretical model of money demand, which reflects backward‐ and forward‐looking preferences in consumption and utility. The former aspect is captured by standard habit formation, and the latter by anticipation of future consumption preferences. By introducing both of these into the Ramsey–Sidrauski framework, we unveil a new highly general model of money demand. We discuss the model in light of the apparent breakdown of money‐demand functions and diminished policy relevance of monetary aggregates.

Bibliometric Analysis on Islamic and Conventional Money Demand

The Islamic finance industry in the world has been snowballing in the last ten years. In its implementation, the Islamic financial system does not use an interest rate system but uses a profit-sharing system. The increase in global Islamic financial assets is in line with the theory that states that the profit-sharing system is better than the interest system because the Islamic money demand model, which uses the profit-sharing system, tends to be more resistant to shocks compared to the conventional money demand model which uses the interest system. This research aims to prove the validity of this theory. By using the method of bibliometric, the author found 391 studies that discussed "Islamic and Conventional Money Demand". The results show that there are 5 cluster which have become research paths, namely the Economic Policy Framework and Financial Analysis, Real Sector Activities, Economic Research Matrix, Financial Governance in Dual Banking Systems, and Money Markets.

Effect of Financial Innovation on Money Demand in the East African Community

Tremendous financial changes have been witnessed in the East African Community’s (EAC’s) macroeconomic landscape over the past few years. These changes can shift various parameters of the money demand model. Many previous empirical studies examined the effect of scale and opportunity cost of holding money variables on money demand. However, most of them left out financial innovation which is one of the key factors influencing money demand. Additionally, they are just country specific studies and used time series data analysis technique. It is in this backdrop that a cross-country case study that investigates how financial innovation affects money demand function was carried out using the recent data and a different analysis technique which is panel data analysis. The objective of the study was to examine the effect of mobile financial innovation on money demand in the EAC. The study used secondary data for the period 2007 to 2020 and this data was obtained from the World Bank and International Monetary Fund. Both descriptive and inferential analyses were carried out. Levin-Lin-Chu test for panel unit root was done and all the study variables were found to be stationary at level. The results of balanced panel fixed effects regression analysis indicated that mobile money, ATMs, and real GDP were affecting money demand positively and their effects were also statistically significant. However, interest rate affected money demand negatively. Mobile money and ATMs were proxies for financial innovation whereas real GDP and interest rates were control variables. Therefore, it was observed that financial innovation has had a positive effect on money demand in the EAC. The findings of this study might be of great importance to monetary authorities and policy makers in the EAC. Future research studies can expand the period of study similar to this one and also increase the number of countries involved.

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.

The Response and Results of Countries to the Fed's Rate Hike

Many financial institutions including Europe and Japan remained healthy during the global financial crisis, with deposits guaranteed by the federal government. The surge in demand for money did not have any destabilizing effects on the banking system. In fact, bank deposits also increased during this period. However, the rise in demand for money did cause some problems for the paper money distribution business. Traditional models of money demand suggest that interest rate cuts and federal stimulus payments to households have played a role in explaining the increase in money holdings. This study estimates that these factors account for only about 20% of the observed increase in currency holdings. The rest of the rise was likely due to increased precautionary holdings by people worried about the liquidity or solvency of financial institutions and as a contingency measure. It is in line with the disproportionate increase in demand for large-denomination. These results shed light on guiding further exploration of interest rates.

THE IMPACT OF ZAKAT ON MONEY DEMAND FUNCTION: EVIDENCE FROM MUZAKKI IN INDONESIA

Most research in the Islamic economy on the money demand have employed the Keynesian approach, while in this research money demand functions are derived from a microeconomic approach. Thus, the aim of this study is to test and analyze some of the key factors in Islamic money demand model with the microeconomics-based approach, and then, in accordance with Islamic principles, chooses muzakki as the best sample. The data source for this study is 200 muzakki in Java, with a period of 2020. Structural Equation Modelling (SEM) is adopted to examine the relationship between the seven constructs, i.e., zakat, PLS rate, state, regulation, goods and services, conspicuous consumption, and money demand. The systemic relationship between the structures indicates that the integrated model of demand for money has a strong zakat relationship, while reliability and validity have been established. Zakat plays a key role in applying the established paradigm of demand for money in relation to goods and services. Zakat significantly affects both goods and services as well as models of money demand. This proposed new model equation is intended to help each household economic actor increase the demand for philanthropic money. As many muzakki are spread throughout Indonesia, it is expected that the welfare of the poor and the low-income society will gradually improve and, finally, the distribution of income in Indonesia will be on an equal footing.

Extending the determinants of currency substitution in Nigeria: Any role for financial innovation?

AbstractExisting literature suggests that macroeconomic and institutional factors are the drivers of currency substitution. The persistent and significant incidence of currency substitution during the period of mixed performance of macroeconomic variables suggests the existence of a knowledge gap on the drivers of currency substitution during the era of rapid technological innovation. To contribute to this literature, we augmented the traditional money demand model of the determinants of currency substitution to introduce financial innovation. We use Nigerian data from 2005Q1 to 2019Q4 and Pesaran et al. (2001, https://doi.org/10.1002/jae.616) autoregressive distributed lag (ARDL) bound test approach to cointegration to estimate the models. The results confirm the presence of short‐run and long‐run relationships between financial technology and currency substitution in Nigeria. In effect, the deployment of financial technology in developing payment system infrastructure creates additional incentives for economic agents to hold foreign currency deposit. Economic managers must, therefore, mainstream credible monetary and fiscal policies to moderate the effect of financial innovation on currency substitution.

(In)Effective tax enforcement and demand for cash

Cash holdings have increased worldwide in recent years. It is well known that a higher tax burden is typically an important factor in explaining an increase in cash holdings. However, the role of tax enforcement is less known. To explore the effect of tax enforcement on cash holdings, we study fiscal reform carried out in a large, developing country. In mid-2013, Mexico tried to raise tax revenues by enrolling more taxpayers and introducing electronic invoices to counter a secondary market in illegal invoices. Based on a transaction-based model of money demand, we find an ambiguous effect of tougher tax enforcement on money holdings. If institutions are ineffective, the model predicts an increase in cash holdings after tougher enforcement. To test this issue empirically, we propose a vector error correction (VEC) specification for money demand. The results suggest that a tax enforcement policy implemented under a weak institutional framework can exacerbate cash holdings.

Ethics de' Competitiveness in Finance: An Emancipative Structured Assessment and Evaluation of Indian Finance Industry

The details of a central bank’s monetary policy are based on assumptions about the money demand. This requires researches that aim to investigate money demand dynamics. Knowing these dynamics will support the identification of risks that may pose a threat to price stability in the long run. This study aims to analyze the changes observed in the demand for money during the last 35 years (1986-2020) in Turkey. When the analyzing period is considered as a whole in the study, it is determined that the demand for money is not stable. However, the nonlinear cointegration analysis used within the framework of soft transition models indicates that the money demand model can be divided into two different regimes with stability. In this case, it is possible to talk about the existence of a transition period in which stability is lost in the demand for money. The analyzing technique used allows the coefficients obtained for money demand to change over time according to the regime in which the economy operates. Nonlinear estimation results indicate that there is a long-term relationship between the demand for money and its macroeconomic determinants such as price level, income, interest rate, and money holding preferences of economic agents.

Is There a Change in the Money Demand Stability in Turkey? A Nonlinear Approach

The details of a central bank’s monetary policy are based on assumptions about the money demand. This requires researches that aim to investigate money demand dynamics. Knowing these dynamics will support the identification of risks that may pose a threat to price stability in the long run. This study aims to analyze the changes observed in the demand for money during the last 35 years (1986-2020) in Turkey. When the analyzing period is considered as a whole in the study, it is determined that the demand for money is not stable. However, the nonlinear cointegration analysis used within the framework of soft transition models indicates that the money demand model can be divided into two different regimes with stability. In this case, it is possible to talk about the existence of a transition period in which stability is lost in the demand for money. The analyzing technique used allows the coefficients obtained for money demand to change over time according to the regime in which the economy operates. Nonlinear estimation results indicate that there is a long-term relationship between the demand for money and its macroeconomic determinants such as price level, income, interest rate, and money holding preferences of economic agents.

MONEY DEMAND AND THE PROLIFERATION OF ALTERNATIVE FINANCIAL ASSETS

We examine the relationship between households’ demand for traditional money and the proliferation of alternative financial assets using a cross-section of countries. We have found that the inclusion of the disaggregated indicators of financial assets improves the money demand models. Notably, this relationship appears to be non-linear. At higher stages of financial development, an increase in alternative assets is associated with a larger decrease in money demand.

Optimal Combination of Currency Assets and Algorithm Simulation under Exchange Rate Risk

The excess money supply did not lead to a rapid rise in the price index, which in turn triggered inflation. In this case, the redetermination of the demand for money is particularly important. At the same time, with the continuous expansion of the capital market and the rapid development of the virtual economy, the virtual economy is gradually deviating from the real economy. When selecting assets, microentities often incorporate virtual economic assets into investment considerations. Therefore, it is necessary to establish a money demand model that considers the impact of virtual economic assets. This paper uses the asset selection of microentities as the microfoundation to establish a money demand model to explain its economic significance. And based on the money demand model established, a dynamic equilibrium model of the money market was established, and the stability of the dynamic equilibrium point of the money market was verified through mathematical deduction. Based on the dynamic equilibrium model of the money market, the impact of money supply was analyzed. In order to verify the correctness of the aforementioned theory, this paper conducts an empirical analysis. Through cointegration analysis and the vector error correction model (VECM model), the correctness and applicability of the established money demand model are verified, and money demand, total social wealth, spreads between expected stock returns and interest rates, and real estate expectations are found. There is a long-term equilibrium relationship between the rate of return and the interest rate. The total amount of social wealth, the expected rate of return on stocks, and the interest rate spread will have an impact on the demand for money in the short term.

Narrow Money Demand in Indonesia and in Other Transitional Economies – Model Selection and Forecasting

Purpose: This paper aims to incorporate model uncertainty in variable selection and forecasting in the monetarist money demand model and check whether the emerging economies such as the Czech Republic, Poland, Hungary, Russia, Mexico, Brazil, Turkey, India, Republic of South Africa, and Indonesia follow this model in the long-run. The case of the United Kingdom serves as a benchmark for the study. Design/Methodology/Approach: In dynamic econometric modeling, the number of potential explanatory variables increases rapidly, and model uncertainty grows very fast. Consequently, empirical modeling of money demand needs a comprehensive strategy for model selection and forecasting. We use Bayesian averaging of classical estimates (BACE) as an appropriate model reduction strategy. The monetary model serves as the theoretical basis for empirical equilibrium error-correction models (EqCM) and employing the Bayesian averaging of classical estimates (BACE) approach for variable and model selection and forecasting. Findings: Four theoretical and competitive model specifications are proposed and empirically tested. We found that monetary systems in Indonesia and other analyzed economies are both stable and theory consistent. The forecasts generated for Indonesia are accurate. The robustness of the model selection based on the BACE procedure was strongly confirmed. Practical Implications: The proposed procedure is valid for practical application, particularly in dynamic model selection and forecasting. Originality/Value: The novelty of this research lies in employing the BACE approach to model the demand for money with the equilibrium error correction (EqCM) mechanism.

Mainstreaming Zakat Instrument to Money Demand Function

In the Islamic economic structure, zakat has been introduced as the main instrument. In the development of the Islamic monetary policy in particular with regard to the amount of money, zakat becomes necessary to investigate its impact. The study focuses in Java, using 200 Muzakki. Structural Equation Modelling (SEM) is adopted to examine the relationship among the seven constructs i.e., Social Values, The Rate of PLS, State, Regulation, Goods and Services, Consumption and Money Demand. While the reliability and validity were established, the structural relationship between the constructs reveals that the integrated money demand model has a strong relationship with the social value in many ways. In relation with goods and services, social value has its significant role to assist the amount of consumption to realize developed money demand model. Islamic social values significantly influence each of good and services as well as money demand model. People will increase the motive for holding money if he wishes to donate some for social purposes. In general, if the people are prosperous, the money demand will increase. Specifically, the result shows several constructs have significant impact in promoting money demand model in Islamic perspective. This suggests that the model as well as the instrument should be further implemented in Islamic money demand.

Modelling opportunity cost effects in money demand due to openness

AbstractWe apply a novel model‐based approach to constructing composite international financial indices (CIFIs) as measures of opportunity cost effects that arise due to openness in money demand models. These indices are tested on the People’s Republic of China (PRC) and Taiwan Province of China (TPC), two economies which differ substantially in size and degree of financial openness. Results show that (a) stable money demand equations can be identified if accounting for foreign opportunity costs through CIFIs, (b) the monetary policy intervention in the PRC over the global financial crisis period temporarily mitigated disequilibrating foreign shocks to money demand, (c) CIFIs capture opportunity costs due to openness more adequately than commonly used US interest rates and (d) CIFI construction provides valuable insights into the channels through which foreign financial markets affect domestic money demand.

MODEL PERMINTAAN UANG DI INDONESIA DENGAN PENDEKATAN VECTOR ERROR CORRECTION MODEL

This research aims to estimate the demand for money model in Indonesia for 2005.22015.12. The variables used in this research are demand for money, interest rate, inflation, and exchange rate (IDR/US$). The stationary test with ADF used to test unit root in the data. Cointegration test applied to estimate the long run relationship between variables. This research employed the Vector Error Correction Model (VECM) to estimate the money demand model in Indonesia. The results showed that all the data was stationer at the difference level (1%). There were long run relationship between interest rate, inflation and exchange rate to demand for money in Indonesia. The VECM model could not explain interaction between explanatory variables to independent variables. In the short run, there were not relationship between interest rate, inflation and exchange rate to demand for money in Indonesia for 2005.2-2015.12.

Evaluating the Model of Demand for Money in Nigeria

Evaluating the Model of Demand for Money in Nigeria

A Cointegration Model of Money and Wealth

Extending the data set used in Beyer (2009) to 2017, we estimate I(1) and I(2) money demand models for euro area M3. After including two broken trends and a few dummies to account for shifts in the variables following the global financial crisis and the ECB's non-standard monetary policy measures, we find that the money demand and the real wealth relations identified in Beyer (2009) have remained remarkably stable throughout the extended sample period. Testing for price homogeneity in the I(2) model we find that the nominal-to-real transformation is not rejected for the money relation whereas the wealth relation cannot be expressed in real terms.

Money velocity and the natural rate of interest

M1 velocity is, approximately, the permanent component of the short-term rate. This implies that agents—in deciding how much wealth to allocate to non interest-bearing M1, as opposed to interest-bearing assets—almost uniquely react to permanent shocks to the opportunity cost, essentially ignoring transitory shocks. This suggests that money-demand models must be modified to allow for such distinct reaction to permanent and transitory variation in the opportunity cost of holding M1. Under monetary regimes making inflation stationary, permanent fluctuations in M1 velocity uniquely reflect, to a close approximation, permanent shifts in the natural rate of interest.

Role of Advertising Expenditure as an Influential Non-traditional Regressor in Russia’s Money Demand Specification

The term advertising refers to the strategy that affects consumer behaviour and induces higher household final consumption expenditure (HFCE), which is associated with incredibly demanding for money upon transaction usages and a reduction in search costs. The model of money demand that is stable, reliable and well defined is crucial for central banks in formulating their monetary policy to minimise the gap between the supply and demand of money. Hence, this paper examines the influence of expenditure in advertising (ADEX) towards the level of demand for money among the households in Russia. An approach known as Autoregressive distributed lag (ARDL) is opted to model the money demand function (MDF) of Russia and nine years of quarterly data from 2008 to 2016 have been used in the estimation. Empirical findings reveal that ADEX not only positively influences the Russian’s money demand in long term, its MDF also becomes more superior when the ADEX has been added. As such, this study suggests that ADEX can be taken into account as a non-traditional explanatory variable in the formulation of a stable and well-specified MDF for the case in Russia.