Standard Money Demand Function Research Articles

The Long-Run Stability of Money in the Proposed East African Monetary Union

This study investigates the stability of money in the proposed East African Monetary Union (EAMU). The study uses annual data for the period 1981 to 2015 from five countries making up the East African Community (EAC). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries. This divergence is articulated in terms of differences in CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long term determinants and error correction in event of a shock. Specifically, the results show that the demand for money is stable in the cases of Burundi, Rwanda and Tanzania based on the CUSUM and CUSUMSQ tests, while for the remaining countries (Kenya and Uganda) only partial stability is apparent. In event of a shock, Kenya will restore its long run equilibrium fastest, followed by Tanzania and Burundi.

The Long Run Stability of Money in the Proposed East African Monetary Union

This study investigates the stability of money in the proposed East African Monetary Union (EAMU). The study uses annual data for the period 1981 to 2015 from five countries making up the East African Community (EAC). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries. This divergence is articulated in terms of differences in CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long term determinants and error correction in event of a shock. Specifically, the results show that the demand for money is stable in the cases of Burundi, Rwanda and Tanzania based on the CUSUM and CUSUMSQ tests, while for the remaining countries (Kenya and Uganda) only partial stability is apparent. In event of a shock, Kenya will restore its long run equilibrium fastest, followed by Tanzania and Burundi.

Long-Run Money Demand Function and Stability among Sixteen (16) West Africa Countries

This study employs annual time series data from 1982 to 2019 for sixteen (16) West Africa countries to investigate the stability of money demand in these countries and the feasibility of the proposed West African Monetary Zone. From a standard money demand function to a bounds test method, co-integration and error correction model, we found significant heterogeneity and divergence across the sixteen (16) countries. The highlight of the findings is that co-integration of the money demand function is only recorded in Ghana but exhibited partial stability from the CUSUMSQ (cumulative sum squared) test. In Nigeria, the biggest economy in West Africa has no co-integration and is only partially stable from the results of the CUSUM test. The significant divergence across these countries as indicated by the test of co-integration, CUSUM (cumulative sum) test, CUSUMSQ (cumulative sum squared) test, the short and long-run factors and error correction in the event of a shock, makes it crucial for the need to include country specific idiosyncratic monetary policy features in the event of a monetary zone in West Africa, and crucial to ensure convergence in their money demand function.

The long run stability of money demand in the proposed West African monetary union

This study examines the stability of money demand in the proposed West African Monetary Union (WAMU). The study uses annual data for the period 1981 to 2015 from thirteen of the fifteen countries making-up the Economic Community of West African States (ECOWAS). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across ECOWAS member states in the stability of money demand. This divergence is informed by differences in cointegration, stability, short run and long term determinants, and error correction in event of a shock.

The Long Run Stability of Money Demand in the Proposed West African Monetary Union

This study examines the stability of money demand in the proposed West African Monetary Union (WAMU). The study uses annual data for the period 1981 to 2015 from thirteen of the fifteen countries making-up the Economic Community of West African States (ECOWAS). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across ECOWAS member states in the stability of money demand. This divergence is informed by differences in cointegration, stability, short run and long term determinants, and error correction in event of a shock.

The stability of money demand in the long-run: Italy 1861\u20132011

Money demand stability is a crucial issue for monetary policy efficacy, and it is particularly endangered when substantial changes occur in the monetary system. By implementing the ARDL technique, this study intends to estimate the impact of money demand determinants in Italy over a long period (1861–2011) and to investigate the stability of the estimated relations. We show that instability cannot be excluded when a standard money demand function is estimated, irrespectively of the use of M1 or M2. Then, we argue that the reason for possible instability resides in the omission of relevant variables, as we show that a fully stable demand for narrow money (M1) can be obtained from an augmented money demand function involving real exchange rate and its volatility as additional explanatory variables. These results also allow us to argue that narrower monetary aggregates should be employed in order to obtain a stable estimated relation.

The demand for euros

This paper investigates the demand for euros using panel data for 10 euro area countries covering the period from 1999 to 2008. Monetary aggregates are constructed to ensure that money is a national concept by excluding deposits owned by non-residents and including external deposits owned by residents. Initial estimates of a standard money demand function yield income elasticities which are high in comparison with what is typically found in the literature. We next expand the money demand function with four wealth and uncertainty variables, of which housing prices is the most significant one. The inclusion of housing prices in the panel regression reduces the income elasticity to around one. Country-specific developments in housing prices are also able to explain part of the monetary overhang in the euro area since 2005. We conclude that housing price developments within the euro area are relevant to an understanding of the demand for euros, and thus warrant close attention by policymakers at the ECB.

How stable is the demand for money in African countries?

Purpose – Studies that have addressed the stability of the demand for money in African countries are rare. A few papers have addressed the issue in a small number of individual countries. For cross‐country comparison, this paper aims to investigate the stability of the M2 demand for money in 21 African countries using quarterly data over the period 1971Q1‐2004Q3.Design/methodology/approach – A standard money demand function is designed. It is estimated using a bounds testing approach to co‐integration and error‐correction modeling.Findings – Application of the CUSUM and CUSUMSQ tests to the residuals of error‐correction models reveals that in almost all 21 countries, M2 demand for money is stable. This could be due to incorporating the short‐run adjustment process in testing for the stability of the long‐run elasticity estimates.Research limitations/implications – Due to data limitations, the study could not be extended to all countries in Africa.Originality/value – This is the most comprehensive study in...

A re-examination of the Japanese money demand function and structural shifts

This paper studies the stability of the Japanese money demand function and concludes that the standard money demand function is instable. The instability of individual data is attributable to a major breakdown of the model from 1992 onward. Thus, contrary to previous studies, we suggest that the poor performance of the model was initiated by the bursting of the bubble and economic recession in the 1990s. Our findings also imply that a simple relationship between broad money, income, and interest rates characterized by the standard model is insufficient for analyzing the effects of current Japanese monetary policy.

Testing Long-Run PPP in the Presence of Sticky Prices

In this paper we show that standard tests for long-run Purchasing Power Parity (PPP) are misspecified if aggregate prices are sticky. Using Monte Carlo simulations, we show that in small samples the ADF test has low power to reject the null of no cointegration when long-run PPP is tested using current prices instead of long-run equilibrium prices. We propose an alternative two-step testing procedure, which consists of, first, estimating long-run equilibrium prices from a standard money demand function and, then, testing long-run PPP as a relationship between the current exchange rate and long-run \QTR{em}{equilibrium} price differentials. Finally, we show that in small samples our proposed test has considerably higher power than the standard ADF test for a unit root in the real exchange rate. We apply our test to the effective exchange rate of the Greek drachma in the post-Bretton Woods period and find that it is closely linked to long-run equilibrium price differentials.

A substitution test of long-run money demand

Using a cash-credit cash-in-advance model, we derive a key long-run substitution condition between interest rates and ratios of alternative means of payment (such as inside and outside monies) which we test as an alternative to the standard money demand function specification of Meltzer (1963). The theoretical model thus eliminates one source of nonstationarity resulting in a more powerful test of the stability of money demand. Using the recent cotintegration techniques of Park (1992) and Johansen (1988), we find strong support for the long-run stability of this alternative money demand specification. Unlike prior research, the findings imply support for long-run money demand stability for narrow monetary aggregates.

The Demand for Money: A Rational Expectations Approach: A Comment

It also differs from the Dutkowsky-Foote estimate because of their use of unseasonally adjusted money stock data and an ending date which is not the ending date reported in their paper. Our dynamic simulations of equations (1) and (2) are shown in figure 2. It is immediately apparent that something has gone very badly awry. Our simulations indicate that the Dutkowsky-Foote model overpredicts money demand over the simulation period January 1975 to June 1985 even more than the standard money demand function; the root mean squared error of the Dutkowsky-Foote model is 0.152 compared to 0.111 for the standard money demand function. Our attempts to replicate both the Dutkowsky-Foote estimates and their dynamic simulations convince us that the authors were not running comparable simulations. For the standard money demand function, they do indeed run a post-sample dynamic simulation. For their own model, however, they run a non-dynamic or static simulation. Given their estimated coefficient for the lagged dependent variable of 0.999, this is virtually equivalent to using the actual lagged money stock. Indeed, we recreated the original Dutkowsky-Foote figure 1 by plotting the actual lagged money stock in lieu of their simulated result; the figures are almost identical. Dutkowsky and Foote (1988, p. 90) state that . . post-sample forecasting ability has become the acid test for money demand models. It is just not cricket, however, to compare a post-sample dynamic simulation of one model with a static simulation of another, as they do. On a level playing field, their model fails the acid test by an even wider margin than the standard money demand model.

Effects of financial innovations on the money demand function: a Canadian evidence

A money demand function for the Candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants. Two sets of estimation results have been analysed: the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations. The estimated equations have been used to generate ex-post simulations and forecasts. The results suggest that innovations have displaced the money demand function in the early 1980s. It also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function.