Behavior Of Money Demand Research Articles

Sectoral Analysis of the Demand for Real Money Balances in Pakistan

The main objective of monetary policy in Pakistan, as in other countries, is to achieve price stability. In order to achieve the objective of stable prices, the State Bank of Pakistan is using M2 definition of money supply as an intermediate target variable to conduct the monetary policy. This choice of target variable is based on the long understanding that only the demand for M2 monetary aggregate is stable in Pakistan. The definition of money aggregates two main sectors of the economy that is business sector and household sector. Theories such as quantity theory, Keynesian and transactions, state that both sectors have diversified behaviour. Money demand behaviour of these sectors largely depends on the different sets of variables. Therefore the aggregation of these sectors is rather poor.

Financial Sector Reforms, Monetary and Output Uncertainties and the Behavior of Money Demand in Kenya: The Divisia Index Approach

The financial sector reforms implemented by the Central Bank of Kenya (CBK) resulted in rapid financial innovation (such as the popular M-Pesa mobile money services) growth, and expansion of several interest earning financial instruments. These developments affect the definition and composition of monetary aggregates, posing a question on the correctness of the current money measures used by CBK. The simple sum aggregates were identified with several theoretical and empirical shortcomings. The rapid financial sector development might affect the stability of money demand function. This study constructs Divisia monetary aggregates for Kenya over the period of 2000’s first quarter to 2015’s third quarter and applies the ARDL method in investigating the stability of money demand function. For the first time, monetary uncertainty and output uncertainty variables are introduced to the Kenyan money demand model. The results reveal that both monetary and output uncertainty has significant influence on money demand in Kenya. This implies that omitting the two variables in the Kenya money demand function might lead to a wrong specification. The money demand function is stable over the period. It means that monetary aggregates targeting is the right framework for monetary policy formulation by the CBK.

Asymmetric impacts of foreign exchange rate on the demand for money in Turkey: new evidence from nonlinear ARDL

Using the nonlinear ARDL bounds test for cointegration, this empirical study explores the long and the short run asymmetric impact of exchange rate shocks on the demand for money in Turkey from 1986:Q1 to 2014:Q4. Two specifications of money demand have been investigated that reveal that demand for money is explained by the scale and opportunity cost variables as well as the foreign exchange rate which accounts for currency substitution. In particular, the nonlinear ARDL model provides strong proof for asymmetry by using the bootstrap test. Our findings suggest that the response of money demand to a negative shock in exchange rate (appreciation) was stronger than its reaction to a positive shock (depreciation). Thus, individuals should expect further appreciation when Turkish lira appreciates. In addition, based on the dominated effect of inflation expectation caused by the currency depreciation, monetary policy makers should achieve more stable exchange rates to anchor price fluctuations. Furthermore, the findings of stable money demand behaviour emphasizes the important role of money to conduct an efficient monetary policy and achieve price stability.

SHORT AND LONG-TERM CAUSALITY RELATIONS BETWEEN BROAD MONEY AND CRUDE OIL, EXCHANGE RATE, COMMODITY OPTION VOLATILITIES

Purpose- The purpose of the study is to examine the dynamics linking broad money (M3) growth and crude oil volatility, euro/dollar volatility, commodity option volatility for the case of the US. Methodology- Causality analysis depending on Vector Error Correction (VEC) models is employed to estimate the relationship between broad money (M3) growth and crude oil volatility, euro/dollar volatility, commodity option volatility for the case of the US. Findings- Causality analysis results stresses that the balance sheet size of FED increase the uncertainties commodity and currency markets and thus volatility in euro/dollar and spot oil price and commodity options can be raised in the long-term. Both instantaneous causality and Granger causality indicate that money demand behavior of US economic agents are not affected from the commodity option, euro/dollar and crude oil volatilities both in short- and long-run. Conclusion- Our empirical analysis implies that monetary aggregate targeting policy of FED can not be negatively mitigated by commodity option volatility, euro/dollar volatility, crude oil volatility indices. For further studies and analysis, we suggest the clarification of channels between monetary policy stance and financial instruments traded in commodity and currency markets.

The behavior of money demand in the Chinese hyperinflation

In this paper I study the behavior of money demand during the episode of hyperinflation that occurred in China after World War II. I consider two popular and competing money demand specifications – the log–log and the semi-log – and show that the log–log performs better than the semi-log in its ability to track the behavior of the money demand. The choice between the two specifications is of great importance, as it implies that welfare cost estimates are very different for hyperinflation. The findings also contribute to the understanding of Cagan’s paradox and the failure of Cagan inflationary finance models. The paradox might be attributable to the popular semi-log schedule for money demand, and the log–log schedule might be an appropriate form for the analysis of hyperinflation.

Perilaku Permintaan Uang Islam: Antara Otentisitas dan Inovasi

In nowadays financial and monetary system, the crisis frequently occurs and becomes a part of its internal system. It indicates the fragility of financial and monetary conventional system and becomes the stimulant of a better system, namely Islamic financial and monetary system. The development of Islamic financial and monetary system demands a rapid innovation, but it should not go beyond the authenticity of Islamic system. Without innovation, the Islamic financial and monetary system will always be left behind, but without based on authenticity it will bring Islamic label on conventional system. This paper tries to discuss about the behavior of Islamic money demand, especially the state of velocity of money. The state of velocity of money is highly depended on to the ongoing money and financial concept. This paper shows that the preservation of authenticity in developing innovations in Islamic money and financial system will usher to the constant velocity of money. Otherwise, it can be concluded that the innovation of Islamic financial and money system without keeping authenticity of Islamic system can produce a different velocity state of money. Some empirical researches confirmed both results namely constant velocity so that monetary policy by targeting money supply can become effective, and there are some empiric researchers found a different result. Based on this, the development of innovations in Islamic financial and money system must be followed by the preservation of Islamic authenticity system. It demands the development of Islamic financial and money system theories which are free form any business motive intervention. Therefore, Islamic University is the most appropriate place to take the intellectual role by conducting researches and teaching the Islamic financial and monetary system.

Financial Innovations, Money Demand, and the Welfare Cost of Inflation

In the 1990s, the empirical relationship between money demand and interest rates began to fall apart. We analyze to what extent financial innovations can explain this breakdown. For this purpose, we construct a microfounded monetary model with a money market that provides insurance against liquidity shocks by offering short‐term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that the introduction of the sweep technology at the beginning of the 1990s, which improved access to money markets, can explain the behavior of money demand very well. Furthermore, by allowing a more efficient allocation of money, the welfare cost of inflation decreased substantially.

Interest rate, money demand and seigniorage: The Chinese hyperinflation 1946–1949

The lack of an observable variable measuring inflationary expectation has been a major difficulty in empirical work on hyperinflation. In this paper we propose a direct measure of expectations—the black-market interest rate in Shanghai—and study the behavior of money demand in the Chinese hyperinflation. Although the log–log schedule may provide an accurate description of money demand with relatively low interest rate, the pattern of seigniorage collected in the highest hyperinflation is consistent with the prediction of the semi-log schedule. The comparison of the seigniorage actually collected with the maximum steady state level shows that the economy might be on the increasing side of the Laffer curve except for the concluding stage of the hyperinflation. This suggests that the Chinese hyperinflation has been driven mainly by the government's quest for revenue.

Financial Innovations, Money Demand, and the Welfare Cost of Inflation

In the 1990s, the empirical relation between money demand and interest rates began to fall apart. We analyze to what extent improved access to money markets can explain this break-down. For this purpose, we construct a microfounded monetary model with a money market, which provides insurance against liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that improved access to money markets can explain the behavior of money demand very well. Furthermore, we show that, by allocating money more efficiently, better access to money markets decrease the welfare cost of inflation substantially.

Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK

In this paper, we estimate separate UK money demand functions for the household and corporate sectors; and calculate estimates of the welfare cost of inflation. We find that the household sector bears most of the welfare burden which is in sharp contrast to previous (US) evidence. Also, we find aggregate welfare cost estimates that are much smaller than previous (largely US) estimates—sufficiently smaller as to challenge the oft-quoted Lucas finding that shoe leather costs are by no means trivial. For the UK, we find welfare costs no greater than one tenth of a per cent of real income.

Comportamiento de la demanda de dinero en Colombia durante el periodo 2000: I-2010: IV

En este artículo se elabora un modelo econométrico para determinar el comportamiento de la demanda de dinero en Colombia, utilizando como marco teórico los fundamentos propuestos por la vertiente monetarista en la reformulación de la teoría cuantitativa del dinero desarrollada por Milton Friedman. El método que se usa para hacer la estimación es el de mínimos cuadrados ordinarios, y la muestra toma datos trimestrales desde 2000: I a 2010: IV. Como variables de escala se utilizan el PIB real y de costo de oportunidad a la tasa de interés de los CDT y al IPVN; como variable aproximada del nivel de precios se asume el IPC.

Short-run money demand

The conventional wisdom holds that the short-run demand for money is unstable. This paper challenges the conventional view by finding a stable demand for M1 in U.S. data from 1959 through 1993. The approach follows previous work in interpreting long-run money demand as a cointegrating relation, and it uses Goldfeld's partial-adjustment model to interpret short-run dynamics. The key innovation is the choice of the interest rate in the money demand function. Most previous work uses a short-term market rate, but this paper uses the average return on “near monies”—the savings accounts and money market mutual funds that are close substitutes for M1. This choice helps rationalize the behavior of money demand; in particular, the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies.

An econometric analysis of money demand function in Sudan, 1960 to 2010

This study is an attempt to test the existence of a stable money demand function in Sudan during the period, 1960 to 2010. The money demand function includes real money balances, real GDP (as scale variable), the rate of inflation and exchange rate (as opportunity cost of holding money balances variables). The study applies cointegration and error correction models to examine the behavior of money demand during the period of analysis, all included variables have been expressed in logarithmic form (with the exception of inflation rate). Based on time series data (annually observations), cointegration results reveal that there is a long-run relationship between real money balances and the explanatory variables. In this long-run relationship, the estimated coefficients are consistent with the economic theory behind the demand for money. Error correction model (ECM) has been used to estimate the short-run money demand function, in which the estimated coefficients are also consistent with the economic theory and generally weaker in magnitude than those related to the long-run equilibrium. In this study, after incorporating the stability tests, the empirical results show that the money demand function is stable between 1960 and 2010. The study concludes that it is possible to use the narrow money aggregate as target of monetary policy in Sudan. Key words: Money demand, cointegration, error correction, stability, Sudan.

HOUSEHOLD MONEY DEMAND IN ROMANIA. EVIDENCE FROM COINTEGRATED VAR / PINIGŲ POREIKIO RUMUNIJOS NAMŲ ŪKIUOSE TYRIMAS NAUDOJANT KOINTEGRUOTUS AUTOREGRESINIUS VEKTORIUS

By the means of cointegrated VAR we investigated the money demand behaviour of households. Using the traditional determinants and adding variables specific for the sector we succeeded to obtain a relevant description of what influences individuals’ money holdings, gradually increasing the number of variables but also restricting on the irrelevant ones. Santrauka Autoriai, naudodami kointegruotus autoregresinius vektorius, tyrė pinigų poreikio pokyčius namų ūkiuose. Tyrimuose buvo naudojami tiek tradiciniai, tiek šiam sektoriui būdingi veiksniai. Nustatyti veiksniai, kurie turi didžiausią įtaką namų ūkiams, taip pat identifikuoti nereikšmingi.

Sectoral Money Demand and the Great Disinflation in the US

Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional specifications of money demand for US households and non-financial firms using flow-of-fund data covering four decades. We find that the benefits were significant for both sectors.

Sectoral Money Demand and the Great Disinflation in the United States

Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional specifications of money demand for U.S. households and nonfinancial firms using flow‐of‐fund data covering four decades. We find that the benefits were significant for both sectors.

Sectoral Money Demand and the Great Disinflation in the US

Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional specifications of money demand for US households and non-financial firms using flow-of-fund data covering four decades. We find that the benefits were significant for both sectors. JEL Classification: E31, E41

On the Welfare Cost of Inflation and the Recent Behavior of Money Demand

Post-1980 US data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semielasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule. (JEL E31, E41, E52)

Differential cash constraints, financial leverage and the demand for money: Evidence from a complete panel of Taiwanese firms

This paper studies firms’ demand for money by developing a differential-cash-constraint framework with firms’ entire wage bills requiring cash in advance and a fraction of investment purchases being financed by credits. In addition to conventional scale and opportunity-cost factors, firms’ financial status and profitability are crucial determinants for their money demand behavior. Employing a new data set consisting of a panel of Taiwanese firms over 1990–97, our econometric analysis lends empirical support to our theory. The estimates suggest that economies of scale in firms’ cash management are present and that lower financial leverage or higher profitability raises money demand significantly.

Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability

This paper extends the literature on profit-sharing banking systems by modeling money demand behavior in Iran. We estimate demand for M1 and profit-sharing deposits over the period 1966–2001. We focus on whether the estimated money demand equations are policy invariant in addition to being temporally stable in the short and long run. Our empirical results persistently suggest that the demand equation for profit-sharing deposits is particularly stable and policy invariant in Iran despite numerous policy and non-policy shocks. These results lend support to the profit-sharing banking system and suggest that profit-sharing monetary aggregates are a credible instrument for monetary policy-making.