Stable Money Demand Research Articles

A granular investigation on the stability of money demand

Abstract A large literature has shown money demand functions constructed from simple-sum aggregates are unstable. We revisit the controversy surrounding the instability of money demand by examining cointegrating income-money relationships with the Divisia monetary aggregates for the U.S., and compare them with their simple-sum counterparts. We innovate by conducting a more granular analysis of various monetary assets and their associated user costs. We find characterizing money demand with simple-sum measures only works well in a period preceding 1980. Divisia aggregates, their components, and their user costs provide a more reliable interpretation of money demand. Subsample analysis across 1980 and 2008 suggests the instability of money demand is a matter of measurement rather than a consequence of a structural change in agents’ preference for monetary assets.

An Empirical Analysis of Money Demand and Its Stability in Zambia 1984-2021

The paper was an empirical analysis of the stability of money demand in Zambia between 1984 and 2021. The money demand function tries to explain the factors that influence people’s demand for money in an economy. The determinants included real income, exchange rate, inflation rate and interest rate. Using E-views 9.0, an appropriate model was estimated for statistical analysis. In the analysis of data, unit root tests were done to check the order of integration of the variables. Furthermore, to test for long term equilibrium relationships among variables the Augmented-Dickey Fuller (ADF) was used to test procedure on the residuals. Out of the many ways of testing for normality, this paper chose the Jarque-Bera test to conduct the normality test on the variables. From this study’s results, the bound test showed that there is a long run cointegration relationship among demand for real money balances, real GDP, interest rates, exchange rate and inflation in case of broad money aggregates. In the long run, all the independent variables are significant determinants of money demand which will be positively affected by percentage changes in exchange rates and negatively by percentage changes in gross domestic product, inflation, and interest rate. The study found that for the implementation of monetary policy in any economy to be successful, it relies heavily on the instruments of monetary policy used as well as the structure of the economy. However, for emerging economies such as Zambia, there are special hurdles that may make the implementation of monetary policy less effective in the achievement of the monetary policy goals. From the findings, it is recommended that as the process of modernizing monetary policy frameworks are implemented in addressing emerging economic challenges, there is need to continue with monetary aggregates in monetary policy conduct.

Measuring the impact of some macroeconomic variables on the stability of demand for money for the period from 2004-2021

Measuring the impact of some macroeconomic variables on the stability of demand for money for the period from 2004-2021

Money demand stability in India: allowing for an unknown number of breaks

Money demand stability in India: allowing for an unknown number of breaks

Long-term stability of money demand and monetary policy in Indonesia

Long-term stability of money demand and monetary policy in Indonesia

The Impact of Digital Currency on Demand for Money: Evidence from Indonesia

The purpose of this study is to examine the impact of digital currency transaction variables on the demand for money in Indonesia. The data used are data on the volume of mobile banking transactions, internet banking, interest rates, the level of currency fluctuations, and inflation on the demand for money for the period 2013 to 2022. Data analysis uses Autoregressive Distributed Lag (ARDL) cointegration method. The results of regression testing can be concluded that the long-term relationship is valid. In addition, using CUSUM and CUSUMQ from the quadratic test, the demand for money in Indonesia is relatively stable using the narrow definition of money, it implies that there haven't been significant and persistent shifts in either the mean or the variance of the narrow money supply. A stable demand for money suggests that the economic agents in Indonesia, such as households and businesses, are not undergoing substantial changes in their preferences or behaviors related to holding money. This stability can have implications for monetary policy and economic planning, as it indicates a certain level of predictability in the demand for money. However, it's crucial to keep in mind that economic conditions and factors influencing the demand for money can change over time. Therefore, continuous monitoring and periodic reassessment of the stability of the demand for money are necessary for accurate economic analysis and policy formulation.

Money demand stability: New evidence from transfer entropy 

Money demand stability: New evidence from transfer entropy 

A Nonlinear Approach to the Analysis of the Financial Innovation-Money Demand Nexus in Nigeria

This study examines the asymmetric roles of financial innovation in the money demand function in Nigeria using annual data over the period 1981-2020. This is with a view to providing insight into how changes in financial innovation have contributed to the level and stability of the money demand function. The study questions the fundamental assumption of the existing literature that growing trends in financial innovation have symmetric or linear effects on the country’s money demand. Hence, it adopts the nonlinear autoregressive distributed lag (NARDL) with bounds testing procedure together with the cumulative sum of recursive as well as the cumulative sum of squares of recursive residuals tests. Results show that the link between financial innovation and money demand is asymmetric and that of the two partial sum variables, only positive changes in financial innovation have significant effects with the sign being positive in both the short run and long run. This shows that assumptions of linearity and no asymmetric structure reported in extant studies for financial innovation are somewhat misleading. Findings also confirm the stability of demand for money in Nigeria on account of the introduction of asymmetric effects of financial innovation. The study concludes that the financial innovation-money demand nexus is asymmetric and that there is stability in the country’s money demand function once asymmetry or nonlinearity is captured in the nexus. Therefore, it recommends the need for monetary authorities to pay attention to positive changes in financial innovation when policies on money demand are formulated for the purpose of enhancing the effectiveness and reliability of monetary policy as a tool for stabilising the economy.

Does digital finance change the stability of money demand function? Evidence from China

Understanding the stability of the money demand function is crucial for determining how money impacts inflation and output, and optimizing monetary policy operations. Our study, using China as a case study, examines the potential effects of digital finance on this stability through cointegration technology. We found that digital finance influences the stability of money demand functions differently across monetary aggregates: it leaves M0 unaltered, doesn't influence the unstable M1, but does disrupt the formerly stable M2. We further investigate how two key services of digital finance - payment and asset management - affect the stability of M0, M1, and M2 demand functions. For payment services, our findings suggest the stability impact on the money demand function follows the order of M0 > M1 > M2. In contrast, for asset management services, the impact is ranked inversely. Consistent with recent studies, our data indicates that employing the Divisia index softens the impact of digital finance on the stability of money demand functions. Moreover, it's essential to monitor the pace of reform and understand how the behaviors of unique economic entities impact the money demand function, while concurrently promoting a deeper reform of interest rate liberalization.

How justified is abandoning money from monetary policy? Evidence from dynamically simulated ARDL

The stable money demand function is a crucial policy tool of the monetary policy of any central bank, which links the monetary sector of an economy to its real sector. Notably, after the global financial crisis of 2007–08, the role of money has come to be envisaged as an essential issue while formulating and conducting the monetary policy, especially at zero lower bound. It is crucial to know whether money demand is stable for inferring a sound monetary policy. To this end, the present study examines the short- and long-run money demand relationship and its stability in India from 2006:Q3 to 2019:Q4. The study has employed a dynamically simulated autoregressive distributed lag (ARDL) cointegration approach, which shows a well-specified and stable money demand in India after incorporating the inflation forecast variable as one of the essential determinants along with other covariates. Furthermore, the dynamically simulated impulse response also supports the economic relationship among variables. The current finding of stable money demand implies a policy implication in terms of focusing on monetary aggregate, in the ongoing flexible inflation targeting framework, as one of the essential information or indicator variables, which acts as a long-term assessment of short-term interest rate setting behaviour to achieve the macroeconomic goals.

An Empirical Study of the Stability of Money Demand

An Empirical Study of the Stability of Money Demand

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.

Economic policy uncertainty and the UK demand for money: evidence from the inter-war period

PurposeThis paper empirically investigates the effect of economic policy uncertainty (EPU) on the UK money demand stability during the inter-war period (1920–1938). Both a narrow definition (M0) and a broad definition (M3) of money are investigated.Design/methodology/approachThe empirical investigation is conducted by employing the autoregressive distributed lag (ARDL) bounds testing approach to cointegration.FindingsResults presented indicate a stable demand for both definitions of money only when EPU is included as one of the determinants of demand function. The EPU imposes a negative effect on the demand for both definitions of money. The causality test results further indicate long- and short-term causality from the determinants (including EPU) to both forms of money demand.Practical implicationsSignificant presence of the economic uncertainty weakens the effects of the monetary policy on the economy.Originality/valueThis is a historical economics paper. Given the turmoil and uncertainty associated with the inter-war period, an empirical investigation of UK money demand is an interesting exercise. This is the first such paper.

The Demand for Simple-sum and Divisia Monetary Aggregates for Pakistan: A Cointegration Approach

Financial liberalisation and the advance of financial innovation in a number of developed economies has been blamed for the break-down in the demand for money based on simple sum measures. This break-down has prompted research into Divisia measures of the demand for money. Like many developing countries, Pakistan is going through a period of financial deregulation which goes hand in hand with financial innovation due to increased competition in the banking industry. This paper employs the methodology of cointegration to compare simple-sum and Divisia level estimates of the demand for money for Pakistan for the period 1974Q4 to 1992Q4. Simple sum measures of M1 and M2 were compared with Divisia versions. The paper reports little evidence in support of the superiority of the Divisia monetary aggregates. Both types of measure produce a stable demand for money and perform satisfactorily in post-sample stability tests, although the Divisia measure appears to perform marginally better on conventional statistical criteria. However, our conclusions have to be qualified by the limitations of the data and the knowledge that the period of financial innovation and deregulation has been relatively recent. The policy significance of the results suggests that currently there is no advantage from switching from simple-sum to Divisia aggregates at the existing level of official aggregation as the proper indicator of monetary policy. However, if financial deregulation and innovation continues at the current pace, the Divisia aggregates may in future prove to be the better indicator.

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.

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.

Asymmetric Impact of Exchange Rate Changes on Money Demand in Malaysia

The relationship between exchange rate and money demand has long been debated among macroeconomists due to its impact on the stability of money demand and monetary policy. Following the significant depreciation in the currency exchange associated with the political instability in Malaysia in recent years, examining the relationship between exchange rate and money demand is crucial to ensure the monetary policy remains prudent. This study examined the asymmetric impact of exchange rate changes on money demand in Malaysia using both linear and nonlinear ARDL approaches. The findings reveal that the money demand responds asymmetrically to exchange rate changes both in the short and long run, whereby the response to a negative shock (local currency depreciation) outweighs the positive shock (local currency appreciation). The result also suggests that the substitution effects dominate the exchange rate and money demand relationship. Consequently, with the economic and political instability continuing, the currency exchange is expected to depreciate further, contributed by the strong substitution effects. This will greatly affect the stability of money demand and the monetary policy and thereby call upon a policy intervention to strengthen the currency exchange and sustain the long-run economic performance.

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.

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.