Estimating money demand functions for South Asian countries

In this paper, we estimate a money demand function for a panel of five South Asian countries. We find that the money demand and its determinants, namely real income, real exchange rate and short-term domestic and foreign interest rates are cointegrated both for individual countries as well as for the panel, and panel long-run elasticities provide robust evidence of statistically significant relationships between money demand and its determinants. Our test for panel Granger causality suggests short-run causality running from all variables, except foreign interest rate, to money demand, and we find evidence that except for Nepal money demand functions are stable.      

Long-run money demand in OECD countries: what role do common factors play?

This article examines the long-run money demand function for 11 OECD countries from 1983Q1 to 2006Q4 using panel data. The distinction between common factors and idiosyncratic components using principal component analysis allows for the detection of cross-member cointegration and the determination as to whether national or international sources are responsible for the non-stationarity of money and its determinants. Indeed, the finding that the common factors are I(1) while the idiosyncratic components are I(0) indicates that cross-member cointegration may exist and non-stationarity in the variables is primarily driven by common international trends. Furthermore, it is found that the impact of income on money demand is positive, whereas it is negative for the interest rate, exchange rate and stock prices. Except for the income elasticity of money demand, all estimated long-run coefficients are larger for the common factors of the variables than for the variables themselves. This article provides evidence that the exchange rate is an important determinant of money demand, whereas the results for the stock prices are ambiguous. Finally, the results of a panel-based error-correction model suggest that several domestic money stocks converge to a common international equilibrium relationship between the common factors.     

Analysing money demand relation for OECD countries using common factors

This article investigates the existence of a long-run money demand relation for a panel data consisting of 13 OECD countries. The analysis is based on the most recent data. The existence of a long-run money demand relation is tested with two new meta-analytic panel cointegrating rank tests which are robust to cross-sectional dependence. Cross-sectional dependency in the data generating process is modelled by unobserved common factors. The observed data are decomposed into idiosyncratic and common components, and these two components are analysed separately to find out the driving forces of the long-run stationary relationship. The evidence shows that the long-run money demand relation is driven by the cross-unit cointegration. Finally, the long-run relation is estimated by taking the common factors into account.     

Money demand in China in the reform period: an error correction model

Based on integration and cointegration test findings, this paper constructs an error correction (ECM) model to evaluate the dynamic adjustment process of money demand in China in the reform period (1979 to 1990). The cointegration tests suggest that some long-run relationship exists among money demand, real income, price, and the real interest rate. The ECM model shows that the dynamic adjustment process of money demand maintains stable and significant relationships to most of its determinants.     

Money demand in Hungary and Poland

This paper analyses the determinants and the stability of money demand functions in Hungary and Poland, using an error-correction framework. The null of stable cointegration relationships cannot be rejected in some specifications. The results suggest that long-run parameters are in line with economic theory. While judging the appropriateness of different strategies of monetary policy on the basis of these findings alone would be premature, the paper suggests that money demand functions can serve as a useful reference for monetary authorities.     

Stability of the money demand function in Asian developing countries

Previous studies that estimated the money demand function in Asian developing countries either employed traditional estimation techniques or recently popularized cointegration technique. While the first group suffers from ‘spurious regression’ problems, the second group interpreted their finding of cointegration as a sign of stability of estimated parameters. This study, after incorporating the CUSUM and CUSUMSQ tests into cointegration analysis, shows that in some Asian countries even though real M1 or M2 monetary aggregates are cointegrated with their determinants, the estimated parameters are unstable.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

The demand for money in korea: Evidence from the cointegration test

This paper shows that there exists a long-run equilibrium relationship between M2 and its determinants, real income and the long-term interest rate, in Korea by using Johansen and Juselius maximum likelihood cointegration method. However, M1 does not have any meaningful cointegration relationships with its determinants. The long-term interest rate is a better proxy than the short-term rate to measure the opportunity cost of holding money. Based on the results, a broad definition of money is a better measure than a narrow definition of money in considering the long-run economic impacts of changes in monetary policy in Korea.     

Detecting cointegration relationships under nonlinear models: Monte Carlo analysis and some applications

Testing for cointegration in the presence of nonlinear adjustments or structural breaks is important for examining the equilibrium relationship among economic variables. It is known that standard cointegration tests perform poorly when a cointegration relationship has nonlinear adjustments or structural breaks. However, it is not clear how some cointegration tests allowing for nonlinearity perform under other classes of nonlinear cointegration models. This paper investigates which cointegration tests help detect a cointegration relationship with nonlinear adjustments or structural breaks. Our Monte Carlo simulation results demonstrate that the cointegration test with threshold adjustment generally has better power performance under most cointegration relationships with nonlinearity. We also provide empirical applications to the money demand and term structure of the U.S. interest rates. The empirical results show that the test allowing for threshold adjustment provides strong evidence of the cointegration relationships of money demand and the term structure of interest rates.     

Long-run estimates of money demand: new evidence from East Asian countries and the presence of structural breaks

Conventionally, the money demand function is estimated using a linear regression of the logarithm of money demand on a number of variables. In this article, we aim to estimate the long-run properties of money demand specification for a number of East Asian economies and within a panel framework with the presence of structural breaks. Various country-specific coefficients are allowed to capture inter-country heterogeneities. Consistent with theoretical postulates, it is found that (a) the demand for money in the long-run positively responds to real income and inversely to the interest rate spread, inflation, the real effective exchange rate and the US real interest rate; (b) the long-run income elasticity is greater than unity; and (c) both the currency substitution and capital mobility hypotheses hold. The empirical findings in this article can provide useful policy guidelines to the East Asian countries’ central banks in their quest for price stability. If one of the primary objectives of these countries is to minimize price instability, they should avoid creating unnecessary disequilibrium in the money market, while the employment of cointegration with the presence of structural breaks clearly recommends to central banks to use the supply of money to attain price and macroeconomic stability.     

The (in)stability of money demand in the euro area: lessons from a cross-country analysis

The instability of standard money demand functions has undermined the role of monetary aggregates for monetary policy analysis in the euro area. This paper uses country-specific monetary aggregates to shed more light on the economics behind the instability of euro area money demand. Our results obtained from panel estimation indicate that the observed instability of standard money demand functions could be explained by omitted variables like e.g. technological progress that are important for money demand but constant across member countries.     

我国货币需求的协整分析及其货币政策建议

本文运用协整以及弱外生和短期因果关系检验 ,对我国货币需求的长期稳定性进行实证 ,由此而产生的主要结论为 :我国货币需求的长期稳定性 (协整 )依赖于时间趋势 ,货币政策目标变量为M1,实际货币政策效应主要体现在促进经济增长。我国货币需求和利率是关于协整向量的弱外生变量。基于上述结论所提出的政策建议为 :当前的货币政策重点应转向于防范通胀     

Estimation of a German money demand system – a long-run analysis

This study presents a multivariate analysis of the stability of long-run relationships between variables that influence the conduct and transmission process of the German monetary policy. The initial VAR comprises the variables real money M3, real GNP, the inflation rate, a long-term and a weighted short-term interest rate. A multivariate approach has been chosen, as this allows for more than one cointegration relationship and to test restrictions on the cointegration space. In contrast to most other studies on German monetary policy, three stable and economically plausible cointegration relationships are obtained simultaneously within the framework of the Johansen procedure: a money demand relationship, a long-run Fisher effect and a long-run relationship between the short- and the long-term interest rate. It is apparent that the structural break of German reunification can be modelled incorporating dummy variables in the model. First version received: October 1996/final version received: July 1997     

Instability in cointegration regressions: a brief review with an application to money demand in Portugal

This study addresses some modelling questions related to the possibility of structural change in models with nonstationary variables. Focusing on cointegration issues, some methodological aspects are discussed, attempting to integrate coherently the several steps of the modelling strategy. These range from unit root to cointegration testing and to testing for instability in the cointegration vector. An empirical example with Portuguese data tries to illustrate the usefulness of this approach, where a simple money demand function is estimated using an error-correction model (ECM). If a break is explicitly allowed in the cointegration vector the forecasting performance of the ECM improves.     

Unit root and cointegration tests: timeseries versus panel estimates for international health expenditure models

Classical regression estimates of the determinants of the OECD health expenditures are useful for policy formulation and evaluation. However, if the underlying timeseries data are not collectively stationary in levels, the estimated parameters are faulty and can misguide health policy. Until very recently, the crucial stationarity tests were ignored in a large number of studies on international comparisons. Stationarity (ADF, Phillips-Perron, IPS heterogeneous panel) and cointegration (Engle-Granger bivariate, Johansen's multivariate) tests are conducted here using 1960–1997 health expenditures data (1998 CD ROM) of 19 OECD countries. It is found that extending the time series data length affects the order of integration and number of cointegrating vectors. However, it is arguable whether the order of integration decreases or increases as more observations are added for testing. The failure of the Johansen and Engle-Granger cointegration tests for most of the OECD countries cautions policy makers against reliance on earlier research findings that were based on unstable relationships among variables in the regression models. (This is not the case for the UK, Greece and Ireland; policy implications have been derived for the UK.) Consequently, data calibrated in growth rates may be more appropriate for investigating the long run relationships collectively in a panel of OECD health expenditure model specifications.     

How stable is the demand for money in Greece?

Abstract

The cointegration technique is now a common method of estimating any money demand function. Numerous studies that applied this technique to estimate the money demand function in Greece, interpreted their finding of cointegration as a sign of stable money demand. In this paper, after incorporating CUSUM and CUSUMSQ tests into cointegration analysis, we show that even though M1 and M2 monetary aggregates are cointegrated with income and interest rate, the M2 money demand function is unstable while M1 is stable.     

MULTIVARIATE COINTEGRATION APPROACH TO THE DETERMINATION OF RESERVES AND BANK CREDIT: A CASE STUDY OF TURKEY*

The paper estimates both long-run reserves and long-run money demand equations using the multivariate cointegration approach. An economic model is constructed, based on the monetary approach to balance of payments in which the monetary authorities can control money supply through changes in bank credit. The vector auto-regressive methodology is used to derive latent equilibrium relationships, and the short-run error correction equations are estimated for both nominal money stock and reserves. A response function for the short-run changes in bank credit is developed. Given the institutional system and slow adjustments, a response function of changes in bank credit to lagged changes in reserves performs well for the period 1960–88.     

MODELLING DEMAND FOR BROAD MONEY IN AUSTRALIA*

The existence of a valid long‐run money demand function is still important for the conduct of monetary policy. It is argued that previous work on the demand for money in Australia has not been very satisfactory in a number of ways. This paper examines the long‐ and short‐run determinants of the demand for broad money employing the Johansen cointegration technique. Using quarterly data for the period 1976:3–2002:2, this paper finds, inter alia, that the demand for broad money is cointegrated with real income, the rate of return on 10‐year Treasury bonds, the cash rate and inflation. It appears that a disequilibrium in the demand for money can affect the efficacy of interest rate policy in the long run via its impact on future output growth and output gap.     

HOUSING WEALTH AND U.S. MONEY DEMAND: A PANEL ESTIMATION

This article estimates a panel model for U.S. money demand using annual state‐level data for the period from 1977 to 2008. We incorporate housing wealth in the demand‐for‐money function and find strong evidence of a relationship between a broad monetary aggregate and housing wealth. This finding is robust to the inclusion of variables measuring financial heterogeneity across U.S. regions. Breaking up the sample in two subperiods shows that panel estimates including housing wealth yield more stable coefficients than both time‐series estimates and panel estimates excluding housing wealth. We also show that the link between money and housing wealth predates the recent boom‐and‐bust cycle. (JEL E41, E52)     

Korean inflation during the US military administration of 1945-1948: a further analysis

This paper investigates the dynamic process of Korean inflation under the US military administration using a structural vector autoregression (SVAR) incorporating cointegration relations among the variables. The results show that government expenditure shocks are primarily responsible for price movements together with money demand shocks having noticeable short-run impacts. The study also shows that government expenditure shocks are the most important source of fluctuations in each of the other variables investigated. The paper concludes that a reform of fiscal and monetary system is necessary to stop the sustaining process of inflation as well as fluctuations in other macro-variables.