Real Money Demand Research Articles

The Demand for Real Money Balances in Zimbabwe: An Error Correction Estimation

Purpose: The purpose of the study is to examine the stability of the money demand function in Zimbabwe. Understanding, the money demand function is a prerequisite for effective monetary policy formulation and understanding the monetary transmission process and shocks propagation in the economy. Materials and Methods: The study employs the error correction modeling methodology to investigate the money demand function for Zimbabwe using quarterly data from 2017q2 – 2023q2. The analysis is expanded to characterize the monetary transmission mechanism following a shock to the price level and how the demand for real money balances responds to both single period and multiple shocks. Findings: The findings confirm a stable long run money demand function that is subject to short run dynamics. In addition, real money demand responds positively to real GDP (Scale factor) and inversely related to the price level (inflation). Short term dynamics (particularly inflation expectations) compound real money demand collapse in response to rising inflation. Implications to Theory, Practice and Policy: Monetary Policy must aim to collapse inflation expectations through a tight monetary control program and a functioning interbank market for foreign exchange to avoid surging parallel market activity.

Measuring real money demand in Cambodia: an ARDL approach to cointegration

The findings obtained through the ARDL approach to cointegration indicate that real income, consumer price index, and interest rate are cointegrated with real money demand. In terms of the estimated results derived from the long-run model, it is observed that real income has a statistically significant positive impact on real money demand, while the general price level and interest rate have a negative impact. The short-run dynamic model, known as the error correction model, demonstrates that all explanatory variables collectively account for the growth rate of real money balances. In the short-run, the growth rate of real income exhibits a positive relationship with the demand for real money, whereas the inflation rate and changes in interest rate have a significant negative effect on the demand for real money balances. The estimated slope coefficient of the short-run dynamic model, which measures the speed of adjustment, is projected to be 60.67%. This outcome suggests that the real money balance model takes no more than two quarters to adjust towards long-run equilibrium in response to short-run dynamic shocks. Stability tests, such as the CUSUM and CUSUMSQ tests, indicate that the real money demand function in Cambodia remains stable in the long-term. The findings derived from this study provide empirical evidence in favor of the quantity theory of money.

Short-term effects of productive credit, savings and money demand on Ecuador’s economic growth, 2006–2020

PurposeThis paper aims to determine causal relationships between the level of productive credit, real deposits and money demand – all of them in real terms – and Gross National Product between 2006 and 2020.Design/methodology/approachThe vector autoregressive technique (VAR) was used, where data from real macroeconomic aggregates published by the Central Bank of Ecuador (BCE) are correlated, such as productive credit, gross domestic product (GDP) per capita, deposits and money demand.FindingsThe results indicate that there is no causal relationship, in the Granger sense, between GDP and financial activity, but there is between the growth rate of real money demand per capita and the growth rate of total real deposits per capita.Originality/valueThe study shows that bank credit mainly finances the operations of current assets and/or liabilities. In addition, economic agents use the banking system mainly to carry out transactional and precautionary activities.

STABILITY OF MONEY DEMAND IN SIERRA LEONE USING AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) APPROACH 1980 – 2018

<p>This work seeks to investigate whether money demand is stable in Sierra Leone. The study uses annual data for the period 1980 to 2018. A standard money demand is defined and estimated using the Autoregressive Distributed Lag (ARDL) approach. This technique permits error correction modeling to examine the short and long-run relationship between money demand and its determinants. The determinants of money demand (MD) are Real Gross Domestic Product GDP(Y) Real Exchange Rate (RER), Real Interest rate (RIR), GDP Deflator used as a proxy for inflation rate were empirically examined to determine their relative statistical significance as they affect money demand. In advance of adopting the ARDL Approach, the time series properties of the variables in the model were examined using the ADF and PP tests. All variable was found to be I(1) - stationary at the first difference, therefore the use of ADRL Approach is suitable and ideal. The model used in this study has passed all of the diagnostic tests – specification, serial correlation, heteroscedasticity, and structural stability. Hence the estimated model cannot be spurious. Therefore, these results are not misleading, rather they are reliable. The test of stability was done using CUSUM and CUSUMSQ plots, and both suggest that there exists a stable relationship between real broad money demand in Sierra Leone and its determinants.</p><p><strong> </strong></p><p><strong>JEL:</strong> E61, E62, P35</p>

A Study on the Factors Influencing Household Consumption from a Money Demand Perspective: Evidence from Chinese Urban Residents

Based on the classic Keynesian theory of money demand and city panel data, in this study, we investigate the impacts of different money demand motives on urban household consumption in China, and provide ideas for promoting sustainable growth in household consumption in China. The results of this study show the following: First, in general, the theory of money demand motivation can adequately explain household consumption in large and medium-sized cities in China. Second, the CPI time series has a significant adverse effect on the real money demand of most households. Third, residents significantly reduce food consumption to satisfy speculative money demand for financial instruments, and the lower the income level, the keener households are to invest in high-risk stocks. Fourth, even for high-income households, the precautionary money demand generated via the purchase of commercial insurance still has a significant crowding-out effect on their total consumption. Social security spending, which reduces the precautionary money demand of households, has a much more positive impact on high-income households.

A Comprehensive Investigation into the Money Demand Function in Cambodia: An Empirical Analysis

The objective of this study is to establish a money demand function in Cambodia. The findings obtained through the ARDL approach to cointegration indicate that real income, consumer price index, and interest rate are cointegrated with real money demand. In terms of the estimated results derived from the long-run model, it is observed that real income has a statistically significant positive impact on real money demand, while the general price level and interest rate have a negative impact. The short-run dynamic model, known as the error correction model, demonstrates that all explanatory variables collectively account for the growth rate of real money balances. In the short-run, the growth rate of real income exhibits a positive relationship with the demand for real money, whereas the inflation rate and changes in interest rate have a significant negative effect on the demand for real money balances. The estimated slope coefficient of the short-run dynamic model, which measures the speed of adjustment, is projected to be 60.67%. This outcome suggests that the real money balance model takes no more than two quarters to adjust towards long-run equilibrium in response to short-run dynamic shocks. Stability tests, such as the CUSUM and CUSUMSQ tests, indicate that the real money demand function in Cambodia remains stable in the long-term. The findings derived from this study provide empirical evidence in favor of the quantity theory of money.

Demand for Money and Inflation in Ethiopia

One of the vital components of the macroeconomic model that helps policymaking is the demand for money function. Having reliable predictions on the money demand function helps in determining the optimum growth of money supply which is vital in controlling the inflation rate in the economy and also preventing monetary disturbances from affecting real output. In order to formulate and estimate the money demand function in Ethiopia, this study used quarterly data from 2000Q3 to 2021Q2 and employed the Ordinary Least Square method and Engle-Granger two-stage procedure for empirical analysis. The empirical result from the models indicates that, in the long run, all variables (real GDP, CPI inflation, real effective exchange rate, real interest rate and lagged real money balance) are significantly affecting the demand for money in Ethiopia. Whereas, the estimated coefficients of the short-run variable show that the real effective exchange rate, CPI inflation, and lagged real money balance are the main determinants of demand for money while the real GDP and real interest rate are insignificant. Another important finding is that absolute value of the coefficient of the error correction term implies that about 54.2% of the disequilibrium in real money demand is counter-balanced by short-run adjustment in each quarter. The study suggests that in conducting monetary policy, policymakers should consider not only the behavior of income and price but also the movement of exchange rates. The study also calls for appropriate formulation and estimation of the all-encompassing demand for money function that is capable of bringing stability to the growth of money coupled with sustainable economic growth.

Asymmetric effects of oil price shocks on the demand for money in Algeria

This paper investigates the symmetric and asymmetric effects of real oil prices on real money demand in Algeria over the period 1999:Q1–2020:Q1. Using a linear autoregressive distributed lag model (ARDL), and a nonlinear autoregressive distributed lag model (NARDL), we find no evidence of a long-term relationship among the variables. Interestingly, we reveal that the NARDL model provides strong evidence of a stable money demand. Moreover, the evidence shows that, in the short-term, only real oil price reductions will result in a decrease in real money demand. In the long-term, our findings suggest that oil price increases (decreases) will lead to higher (lower) money demand. Additionally, we find that negative oil price shocks will yield a stronger effect on money demand compared to positive shocks. These results indicate that money demand is a channel through which oil price shocks may affect the macroeconomic activity in Algeria. Therefore, Algerian policymakers should incorporate this asymmetric relationship between oil prices and money demand in designing their monetary policies.

The demand for money and the real exchange rate misalignments in emerging European countries: A nonlinear approach

AbstractThis paper investigates the extent to which domestic and foreign money balances in emerging European countries are influenced by foreign exchange considerations. A well‐specified and stable relationship between real money demand and the exchange rate can be perceived as an important part of a successful monetary policy. This study examines the long‐run determinants of real exchange rates (RERs) associated with the behavioral equilibrium exchange rate (BEER) approach and identifies currency misalignments in these countries. The misalignment is later used to test the nonlinear behavior of the demand for money. The results indicate that the RER misalignments have a significant impact on domestic money demand. When the currencies are overvalued, there is a reduction in domestic money demand, and when they are undervalued, there is an increase in domestic money demand. Furthermore, it can be concluded that overvaluation causes an increase in foreign money demand indicating a shift of preference from domestic to foreign currency.

Structural Stability Analysis in a Dynamic IS-LM-AS Macroeconomic Model with Inflation Expectations

In this article, we carry out the structural analysis of an IS-LM-AS macroeconomic model with adaptive inflation expectations, exploring the presence of a possible local bifurcation. We prove that the model is structurally unstable when the speed with which economic agents adjust their expectations about future inflation is equal to the inverse of the semi-elasticity of real money demand with respect to the nominal interest rate since the periodic solutions are lost when the adaptive expectations parameter suffer any small change, ceteris paribus. Additionally, the phase portraits of the instantaneous rate of change of the real interest rate, the inflation rate, and the instantaneous rate of change of the inflation rate are numerically simulated in ℝ 3 with MATLAB for three asymptotically and locally stable cases and for the degenerate Hopf bifurcation. Finally, our results show that, specifically, in the case of pure conjugate complex eigenvalues, the economy could enter periods of an inflationary/deflationary spiral when the adaptive expectations parameter is of greater magnitude to the inverse of the semi-elasticity of real money demand balances with respect to the nominal interest rate, regardless of its initial state.

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.

ANALISIS PERMINTAAN UANG PADA MASYARAKAT ISLAM KONTEMPORER

This study aims to analyze and determine the effect of interest rates and GDP on the demand for money in contemporary Islamic society. This type of research is descriptive and associative. While the type of data is documentary data, the data source is secondary data and time series data from the first quarter of 2015 to the fourth quarter of 2018. The analysis tool is a simultaneous equation model using the Two Stages Least Squared (TSLS) method.
 The results of the study conclude that the existing estimates explain that interest rates do not have a significant effect on the demand for money. This fact supports the initial hypothesis which states that there is no effect of interest rates in motivating a contemporary society to hold money in Indonesia. What has a significant effect on the demand for real money based on estimates, is that the level of income in accordance with the theory of income levels will have a positive effect on the demand for money.
 Based on the results of the research conducted, suggestions can be given, namely, even though the results show that there is no significant relationship between the interest rate and the demand for money, it is not necessarily the insignificant effect of the interest rate because most Indonesian people embrace Islam and have good awareness. against the prohibition of interest, but it could also be due to the high rate of profit sharing from Islamic banks.
 So that there is no such public attitude, we still need to promote Islamic banking products, and a good explanation about the prohibition of interest. In addition, the improvement of Islamic banking services is also very important in this regard.

Monetary Aggregation and Speculative Real Money-Demand Equation: Theories, Evidence and Policy

Monetary Aggregation and Speculative Real Money-Demand Equation: Theories, Evidence and Policy

Monetary Aggregation and Speculative Real Money-Demand Equation: Theories, Evidence and Policy

Monetary Aggregation and Speculative Real Money-Demand Equation: Theories, Evidence and Policy

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.

Marshall Lerner Condition for Money Demand

This article derives a twofold Marshall Lerner condition for money demand such that the current account may increase or decrease upon respective decrements or increments in the real exchange rate. This is noteworthy because the historic Marshall Lerner condition is such that the current account increases on account of a depreciation in the real exchange rate, yet, the current account also increases if the real exchange rate appreciates: the seeming contradiction is resolved by realizing that the current account respectively increases on account of a fundamental increment in (i) the real money supply and (ii) money demand, which increments respectively affect the real exchange rate in terms of a depreciation and an appreciation, concomitantly. The explanation advanced by the historic Marshall Lerner condition is therefore incomplete or superficial, if not ultimately misleading: the problem is hereby rectified.

Asymmetrical Effects of Real Exchange Rate Volatility during Covid-19 Pandemic on the Demand for Money in Zimbabwe

The understanding of symmetrical or asymmetrical effects of exchange rate volatility improves the effectiveness of macroeconomic management policies. This study examines the long-run asymmetrical effects of exchange rate volatility on real demand for money in Zimbabwe, using monthly data from January 2018 to September 2020. Exchange rate shocks are calculated by decomposing exchange rate volatility measure into positive and negative components to examine their short-run and long-run effects and to determine whether the long-run effects of the components of exchange rate movements are symmetrical or asymmetrical. The linear ARDL and the non-linear ARDL models are estimated. The study employs the F-bounds test to confirm the longrun relationship and the Wald test for the asymmetrical effect. The results show that exchange rate depreciation in Zimbabwe has symmetrical effects on real demand for money. Thus, exchange rate policies in Zimbabwe should assume linearity in the passthrough effects on real demand for money.
 JEL Classification: E41; E52; E6

Should the Loss-aversion Behavior be Significant for Central Bankers? Evidence from Behavioral Economics

This paper compares the effectiveness of the monetary policy based on conventional utility function and prospect theory. According to prospect theory, in the face of uncertainty, people make decisions based on perceived losses and benefits, so they are more sensitive to losses than to gains of equal size. Achieving this goal, we estimated the DSGE Model for the Iranian economy. The results of Bayesian estimation showed that under prospect theory, the inclusion of the loss-aversion component affects the household consumption behavior, the labor supply, and the real money demand. Also, The results of the Impulse-Response analysis show that an expansionary monetary shock led to an overestimate of inflation expectations due to fear of losses resulting from rising inflation. Hence, under the prospect theory, inflation increases relatively more, and the interest rate decreases with less intensity. Moreover, the more attention to the behavior of loss-aversion agents by policymakers, the less volatility is in macroeconomic variables.

THE EFFECT OF MONETARY POLICY ON UNEMPLOYMENT RATE IN INDONESIA

This study aims to determine the influence of monetary policy on the unemployment rate in Indonesia. Unemployment is one of the fundamental problems in the economy. The unemployment problem can be overcome by monetary policy. This study used time series data with the period 1975-2016 using real money demand, economic growth, real interest rates, and real exchange rates as independent variables, and the unemployment rate as the dependent variable. The data used in this study is secondary data obtained from the World Bank. The method used is ARDL (Autoregressive Distributed Lag) which can change a static economic theory to be dynamic by taking into account the role of time explicitly. The results show that in the long run the probability value of the economic growth variable is below the 5% significance level which indicates that economic growth had a negative and significant effect on the unemployment rate. In the short run, the real interest rate, the real interest rate at lag 1, economic growth at lag 1 and lag 3, and the real exchange rate at lag 1 had a negative and significant effect on the unemployment rate. This indicates that the impact of monetary policy on the unemployment rate is temporary.Keywords: Unemployment Rate, Monetary Policy, ARDL.JEL : E24, E52, E61.