Economic Uncertainty,Monetary Uncertainty,and the Demand for Money: Evidence From Asian Countries

In 1984 Nobel Lauriat Milton Friedman claimed that the decline in velocity of money or an increase in the demand for money was due to volatility of money supply. Another study argued that if monetary volatility could impact the demand for money, so can output volatility (as a measure of economic uncertainty). Both measures of uncertainty can cause people to reallocate their assets between cash and real assets that are less risky. If public become more cautious about the future, they will hold more cash today. However, if they chose to hedge against uncertain prices, they may hold more real assets and less cash. These two hypotheses are tested for Asian countries using bounds testing approach. While both measures are found to have short‐run significant effects on the demand for money in almost all countries, the short‐run effects last into the long run in half of the countries. Furthermore, we find positive and negative effects of both measures which are in line with previous research related to a few developed countries.     

Economic policy uncertainty and demand for money in Australia

The demand for money has received a great deal of attention in the empirical literature. This literature, however, has emphasized factors such as interest rate, income, inflation rate and exchange rate as the primary determinants of money demand. Although an emerging strand of literature examines uncertainty as a potential determinant of money demand, findings have been mixed. Using a news-based Economic Policy Uncertainty (EPU) index and Australian quarterly data from 1998 to 2017, we study the impact of policy uncertainty on demand for money. Autoregressive distributed lag (ARDL) results show that the economic policy uncertainty measure has a negative short-run effect on the demand for money, suggesting the wider public hedge against future expected inflation, and positive long-run effect, whereby the broader public hold more cash to stay liquid during times of economic uncertainty. Also, introducing nonlinearity into the money demand equation, we find an asymmetric effect, more in favour of currency appreciations, supporting the expectations effect of further appreciations in exchange rate movements.     

The impact of economic and monetary uncertainty on the demand for money in emerging economies

By introducing uncertainty, monetary volatility and economic volatility are said to make the public cautious, hence increase their cash holdings or their demand for money. On the other hand, because of monetary and economic uncertainty if the public seek safer assets than money, they may hold less cash. In the absence of any paper testing for the impact of economic and monetary uncertainty on the demand for money in emerging economies, this article fills the gap by considering the experiences of six Central and Eastern European emerging economies and four other emerging economies. We found that the impact is transitory in most countries. Moreover, money demand is found correctly specified and stable in most countries, suggesting that policy based on monetary targeting could still be effective despite significant output and monetary uncertainty.     

Economic uncertainty,monetary uncertainty and the Korean demand for money

Economic uncertainty and monetary uncertainty are said to affect public’s holding of money in either direction. In this paper, we consider the Korean demand for money, and after including two GARCH-based measures of output uncertainty and monetary uncertainty, we show that both measures exert significant effects on the demand for money in Korea in the short run. However, only the adverse effects of output uncertainty lasts into the long run. Indeed, including the two uncertainty measures yield a stable demand for money in Korea.     

Asymmetric effects of exchange rate changes on the demand for money in Africa

In order to account for currency substitution, the exchange rate is included in the demand for money. More recent studies have demonstrated that exchange rate changes could have asymmetric effects on the demand for money or domestic currency. In this paper, we consider the experiences of 18 African countries and show that in most countries, indeed exchange rate changes have short-run asymmetric effects on the demand for money. However, short-run effects translate to long-run asymmetric effects only in a limited number of African countries.     

More evidence on the asymmetric effects of exchange rate changes on the demand for money: evidence from Asian

We try to assess the impact of exchange rate changes on the demand for money in eight Asian countries. When we followed the previous literature and the standard linear Autoregressive Distributed Lag (ARDL) approach, we found exchange rate changes had no long-run significant effects in five out of the eight countries in our sample. However, when we applied the nonlinear ARDL approach and separated appreciations from depreciations, at least one of them or both had significant effects on the demand for money in India, Indonesia, Korea, the Philippines, and Singapore, supporting asymmetric effects of exchange rate changes. There was also evidence of short-run asymmetric effects.     

ECONOMIC UNCERTAINTY,MONETARY UNCERTAINTY AND THE DEMAND FOR MONEY IN AUSTRALIA

The demand for money and its stability in Australia has received a great deal of attention in the past and has resulted in its own literature. Depending upon estimation method and period of analysis, previous research has provided mixed findings. By including a measure of economic uncertainty and a measure of monetary uncertainty (both GARCH‐based) in the long‐run money demand for M3, and by using the bounds testing approach under which variables could be stationary or non‐stationary, we provide strong evidence that the M3 money demand in Australia is stable. Both uncertainty measures do have short‐run as well as long‐run effects on the demand for M3 in Australia, factors that previous research did not consider.     

Asymmetric responses of money demand to oil price shocks in Saudi Arabia: a non-linear ARDL approach

Saudi Arabia is an open oil-based economy with fixed exchange rates; therefore, it has limited monetary policy autonomy. Using non-linear autoregressive distributed lag approach, this article investigates the asymmetric effects of oil price shocks on the demand of money in Saudi Arabia over the period 1990:Q1–2014:Q4. The empirical results show evidence of positive long run but asymmetric effects of oil price shocks on the money demand. In particular, we find that the positive oil price shocks are more important than negative shocks. Therefore, two policy responses can be considered: either sustaining the fixed exchange rate regime and following an economic diversification policy or switching towards a flexible exchange rate regime to achieve price stability. In that case, the existence of a stable money demand function in Saudi Arabia is a necessary precondition for adopting a monetary policy strategy targeted to price stability using instruments like money targeting.     

(In)Effective tax enforcement and demand for cash

Cash holdings have increased worldwide in recent years. It is well known that a higher tax burden is typically an important factor in explaining an increase in cash holdings. However, the role of tax enforcement is less known. To explore the effect of tax enforcement on cash holdings, we study fiscal reform carried out in a large, developing country. In mid-2013, Mexico tried to raise tax revenues by enrolling more taxpayers and introducing electronic invoices to counter a secondary market in illegal invoices. Based on a transaction-based model of money demand, we find an ambiguous effect of tougher tax enforcement on money holdings. If institutions are ineffective, the model predicts an increase in cash holdings after tougher enforcement. To test this issue empirically, we propose a vector error correction (VEC) specification for money demand. The results suggest that a tax enforcement policy implemented under a weak institutional framework can exacerbate cash holdings.     

Firms’ money demand and monetary policy

Standard New Keynesian models for monetary policy analysis are ‘cashless’. When the nominal interest rate is the central bank's operating instrument, the LM equation is endogenous and, it is argued, can be ignored. The modern theoretical and quantitative debate on the importance of money for monetary policy conduct, however, overlooks firms’ money demand. Working in an otherwise canonical New Keynesian setup, we show that macroeconomic dynamics are critically affected by the firms’ money demand choice. Under the conventional Taylor‐rule framework, we prove that equilibrium determinacy may require either an active interest rate policy, overreacting to inflation, or a passive interest rate policy, underreacting to inflation, depending on the elasticity of production with respect to cash balances. We then develop a numerical analysis to evaluate our theoretical results. We find that macroeconomic stability is more likely to occur under an active, but not overly aggressive, monetary policy stance. We also examine the dynamic effects of forward‐looking feedback rules. We show that, in this policy regime, indeterminacy is likely to be induced by both active and passive rules, even for relatively low productivity effects of money.     

基于MS-VECM模型的我国货币政策非对称研究与启示

通过建立马尔可夫区制转移误差修正模型（MS-VECM）模拟我国货币政策对经济的非对称影响,以此分析我国货币政策的有效性。根据经济波动幅度,将我国经济划分为高波动和低波动两个区制状态,经济增长波动剧烈的区制下向均衡状态调整速度快于经济波动幅度较低区制下的调整,论证了我国货币政策对经济的影响在不同区制下存在非对称性。并用模型对我国经济状况进行了模拟预测,利用这种非线性的模型能够很好地预测货币与产出增长关系,表明现阶段我国经济运行状态是一低波动区制下的正常回落,目前不宜出台强扩张性的货币政策刺激经济增长。     

A K% MONEY GROWTH LEADERSHIP RULE IN AN INTERNATIONAL MONETARY POLICY GAME

This paper examines a version of the Friedman k% money growth rule in an open economy monetary policy game. Using the two-country model proposed by Canzoneri and Henderson (1991), we show that, in response to asymmetric aggregate demand shocks, the Pareto-efficient outcome can be achieved by a policy that we call a k% money growth leadership rule. Following that rule, one country, the leader, sets her money supply growth rate, and the follower sets her money supply growth rate so as to keep the sum of nominal money supply growth at k%. We show that this policy yields the same outcome as does cooperative equilibrium. We also show that alternative policy rules, such as keeping exchange-rate adjusted money supply growth at k%, or forming a currency union, will not lead to the Pareto-efficient outcome in response to these demand shocks. ( JEL E5, F3)     

Fiscal policy uncertainty and the business cycle: Time series evidence from Italy

Economic uncertainty is an important factor behind macroeconomic fluctuations: in an uncertain environment, firms reduce hiring and investment; financial intermediaries are more reluctant to lend; households increase their propensity to save. In the present paper, we study the effects of the uncertainty which arises from fiscal policy decisions and propose a new measure of fiscal policy uncertainty (FPU). In particular, we estimate a fiscal reaction function, allowing the volatility of the shocks to be time-varying. The time series of this volatility is our proxy for FPU. Looking at Italian data over the period 1981–2014, we find that an unexpected increase in our measure of FPU has a negative impact on the economy. One implication of this result is that the same change in the government budget can have different effects depending on whether it is associated with a reduction or an increase in FPU. Therefore, the neglect of FPU may partly explain why the size (and sign) of fiscal multipliers differs so much across existing empirical studies.     

Government policy under price uncertainty: A source of volatility in illegal immigration

This paper provides an alternative explanation for why illegal immigration can exhibit substantial volatility. We develop a model economy where migrants make decisions in the face of uncertain border enforcement and transfers from the host country. The uncertainty is extrinsic, a sunspot, and arises due to ambiguity regarding government policy; the sunspot manifests itself as uncertainty in the commodity price of money. Immigration volatility stems from both the trade‐off between the marginal benefits and costs (transfers and enforcement) to migrating and the existence of a sunspot. Finally, we examine the impact of changes in government policies on migration levels.     

Money Market Uncertainty and Retail Interest Rate Fluctuations: A Cross-Country Comparison

Abstract. This paper analyzes empirically the relationship between money market uncertainty and unexpected deviations in retail interest rates in a sample of ten OECD countries. We find that, with the exception of the United States, money market uncertainty has only a modest impact on the conditional volatility of retail interest rates. Even for the United States, we find that the effects of money market uncertainty are spread out over time. Our results also indicate that money market uncertainty tends to be passed on to retail rates to a lesser extent in countries where banking relationships play a substantial role.     

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.     

Exchange rate volatility and export performance: a cointegrated VAR approach

During the last decades Norwegian exporters have–despite various forms of exchange rate targeting–faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth–in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.     

Whose policy uncertainty affects commodity trade between Australia and the United States?

Recent studies are assessing the impact of news-based policy uncertainty measure on trade flows between countries. In this paper we add to this new literature by investigating the symmetric and asymmetric effects of Australian policy uncertainty index and the U.S. index on trade flows of 63 two-digit industries that trade between the two countries. When we estimated a symmetric and linear model for each industry, we found short-run effects of both uncertainty measures on 30% of the industries' trade flows. However, this number increased to 70% when an asymmetric and nonlinear model was estimated. The long-run effects of both policy uncertainty followed similar pattern. Less than 10% of trade was affected by the estimates of the linear models. However, estimates of the nonlinear models predicted that 41.20% (26.53%) of the U.S. exports to Australia was affected by the U.S. uncertainty (Australian uncertainty). As for the Australian exports to the United States, 6.72% (5.5%) of its exports were affected by the changes in the U.S. policy uncertainty (Australian uncertainty). In almost all industries, increased uncertainty was found to hurt the trade and decreased uncertainty was found to boost it at different rate or asymmetrically. In sum, the U.S. and Australian policy uncertainty measure affects U.S. exports to Australia much more than they affect Australian exports to the United States.     

Financial innovation and regional money

This article studies the effect that financial innovation, which has been very common in recent years, has on money. Using Japanese regional data and the money demand specification, we first provide evidence of instability in the simple money-output relationship. However, when this relationship is extended to include a proxy for a comprehensive measure of financial innovation, the model is found to be stable. Furthermore, consistent with economic theory, evidence is obtained of financial innovation leading to decreased demand for liquid financial assets. In this respect, in Japan demand deposits seem to possess very similar characteristics to cash over recent years.     

Oil price uncertainty and the business cycle: Accounting for the influences of global supply and demand within a VAR GARCH-in-mean framework

ABSTRACT

This article reinvestigates the influence of oil price uncertainty on real economic activity in the United States using a four-variable VAR GARCH-in-mean asymmetric BEKK model. In contrast to previous studies in this area, the analysis focuses on business cycle fluctuations and we control for global supply and demand factors that might affect the real price of oil, its volatility as well as the US economy. We find that – even after accounting for these factors – oil price uncertainty still has a highly significant negative influence on the US business cycle. Our computations show that the effect is economically important during several periods, mostly after a significant variance shift in the mid-1980s. We simultaneously estimate the effect on the global business cycle but find that it is comparatively weak. Finally, significant spillover effects in the GARCH model suggest that oil price volatility is a gauge and channel of transmission of more general macroeconomic shocks and uncertainty. These linkages are particularly strong in case of unexpected bad news.