Money Demand and Purchasing Power Parity (PPP), in the Republic of South Africa |
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Authors: | Paul M Thomas Motlaleng G R |
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Institution: | 17.Department of Economics, University of Botswana, Botswana ;37.National Institute of Bank management, Pune, 411048, India ;27.Department of Economics, University of Botswana, Private Bag 0022, Gaborone, Botswana ; |
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Abstract: | We have examined empirically two important economic relationships, the Purchasing Power Parity (PPP) and the money demand relationship, among the consumer prices, money, output, interest rates, and the nominal rand/dollar exchange rate of the Republic of South Africa (RSA) for the sample period from 1993 second quarter to 2003 second quarter within the frameworks of co-integration and Error Correction Model (ECM). It is established that the strong version of the PPP including the proportionality and the symmetry hypothesis, is supported. The changes in the rand/dollar exchange rates are influenced by the long term trends in the consumer prices of the RSA and the USA. There also exists a well defined money demand function for this period. The broad money demand is influenced by the consumer prices, the GDP and the interest rates. The short-term interest rates are found to be the own rate of return for broad money and the long-term bond yield is the opportunity cost of holding money. The monetary policy works through the short term interest rates. |
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