The stability of german money demand: Not just a myth

The stability of German money demand has been analyzed in a series of papers in recent years, especially since unification. In this paper the critical question of stability is reviewed, using various estimation techniques and testing procedures for long-run stability. To take financial innovations into account, the opportunity cost measure is calculated by differentiating between traditional savings deposits and special savings facilities, which are a major form of financial innovation in Germany. Overall, there are strong indications of a stable long-run money-demand relationship.I am indebted to G. Coenen, D. Gerdesmeier, B. Landau and A. Worms of the Deutsche Bundesbank, H.-E. Reimers, J. Wolters, two anonymous referees, as well as the participants in the workshop on Money demand in Europe for valuable comments. The data may be obtained from the internet, http://wotan.wiwi.hu-berlin.de/oekonometrie/engl/data.html     

Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.     

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.     

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 the EU: Evidence for area-wide aggregates

Long-run properties of EU-wide money aggregates are analysed. For each of the three aggregates considered-Currency, M1 and M3H-it is possible to obtain cointegrating relationships with GDP and interest rates (long or short term market interest rates). Results are not improved when traditional aggregates, obtained by aggregating existing national aggregates, are extended by the inclusion of various measures of Cross-Border Holdings. Specific attention is also paid to aggregation issues and the relative performance of area-wide and national equations. The results show that aggregation bias is not a major problem and that the relatively good area-wide performance is largely a consequence of a statistical averaging effect.gf.gfagan.hg.eunet.deBoth authors are in the Stage Three Division of the Monetary, Economics and Statistics Department of the European Monetary Institute. The authors would like to thank colleagues at the EMI and participants at an EMI conference on EU money demand, held in 1995, for helpful comments and suggestions. Comments received from participants in the 1997 Econometric Society European Meeting and in the Workshop on Money Demand at Berlin Humboldt Universität in 1997 are also gratefully acknowledged. The final version benefited from comments by the editors and two anonymous referees. Opinions expressed in the paper are only those of the authors and do not necessarily represent the views of the EMI.     

Testing the demand regime hypothesis in the Euro Area. Evidence from a VAR approach

The article brings new evidence that intra Euro Area trade imbalances should be thought of as the outcome of the interaction of opposing growth strategies between northern/surplus countries (Austria, Belgium, Germany, Netherlands) and southern/deficit countries (France, Italy, Portugal, Spain). By using a vector autoregression model, econometric evidence clarifies that the demand regime in the southern region is wage-led, while profit-led in the northern region. Moreover, a downward-wage adjustment in the northern region (negative wage shock) contributed to increasing the intra-EA trade surplus vis-à-vis the southern region by far more than an upward-wage adjustment in the southern region (positive wage shock).     

Stability of money demand in Switzerland: A comparison of the M2 and M3 cases

Long-run parameters of money demand functions for Switzerland's M2 and M3 aggregate are estimated and their stability investigated. For both aggregates a single stable cointegrating vector is found. Around these long-run relationships a single-equation model for m2 and a single-equation model for cpi is built respectively for M2 and M3, and both estimated models are found to be stable. Testing forecast performance, the cpi model seems to be superior to the m2 model, providing some positive signs that the M3 model is stable in the sense that it does not suffer from a structural break during the period of estimation.We would like to thank Jürgen Wolters and two anonymous referees for their comments and Neil Ericsson, David Hendry, Katarina Juselius, Helmut Lütkepohl, Grayham Mizon and the other participants of the Workshop on Money Demand in Europe, Berlin, October 10–11, 1997, where an earlier version of the paper was presented, for their suggestions. The data may be obtained from the internet, http://wotan.wiwi.hu-berlin.de/oekonometrie/engl/data.html. The views expressed here are those of the authors and do not reflect the views of the Swiss National Bank.     

Money demand in the czech republic since transition

We analyse the demand for money since the “break up” of the Czech-Slovak Republics at the beginning of 1993 and for the aggregates M0, Ml, and M2 using monthly data. Due to the widespread use of foreign currency in formally centrally planned economies, we also investigate the issue of currency substitution. Because of our relatively small sample period the Johansen cointegration approach is not used and instead we use the general to specific methodology in a single equation framework. Previous empirical evidence on money demand in Eastern Europe, and specifically Czech Republic, has been mixed. Both graphical and empirical results suggest that any currency substitution was a one-off event due to increased uncertainty at the end of 1992 at the time of the monetary dissolution. Certainly, currency substitution in the Czech Republic is not as strong as has been found in other former centrally planned economies. However, our results do indicate that Czech National Bank may have to take account of foreign interest rates when interpreting movements in the monetary aggregates.     

The Stability of the Demand for Money in Monetary Unions: Some Empirical Evidence from WAEMU

Previous studies of the stability of the demand for money have been largely conducted in the context of individual countries. To the extent that these countries have control over their monetary policies, such an approach is well justified. However, for monetary unions, where the control over monetary policy is usually vested in a central or outside authority, it is more appropriate to examine the stability of the money demand for the union as a collective entity. This paper follows this approach with respect to a West African monetary union, the WAEMU, whose monetary policies are largely dictated by the French authorities. Using cointegration theory and CUSUM stability tests, we find evidence that the demand for broad money is stable in this union. Given the empirical results, the paper draws inferences regarding their implications for the formulation of optimal monetary policy for the WAEMU.     

Wealth effects on money demand in the euro area

We investigate the determinants of money demand (M3) in the euro area, considering that this variable remains an important co-determinant of monetary policy making by the European Central Bank. Regressing the real stock of M3 on real GDP, interest rates and wealth variables (real housing and stock prices) within an error-correction framework provides evidence of positive wealth effects on money demand in the long run. Correcting for this wealth effect, money demand in the euro area has grown almost exactly in line with the official reference value of 4 1/2% per annum. This article builds on research that was conducted in preparation of the annual OECD Economic Survey of the euro area and reported in Boone et al. (2004). The authors thank their colleagues in the Economics Department and the European Central Bank and two anonymous referees for their valuable comments. The authors assume full responsibility for any remaining errors and omissions. The opinions expressed in this article do not necessarily represent those of the OECD or its member countries     

Money demand, the Cagan model, testing rational expectations vs adaptive expectations: The case of Turkey

This paper estimates the Cagan type demand for money function for Turkish economy during the period 1986:1–1995:3 and tests whether Cagan's specification fits the Turkish data using an econometric technique assuming that forecasting errors are stationary. This paper also tests the hypothesis that monetary policy was implemented in aiming to maximize the inflation tax revenue. Finally, the Cagan model is estimated with the additional assumption of rational expectations for Turkey for the considered period. First version received: March 1998/final version received: October 1998     

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.     

Testing for the Fisher hypothesis under regime shifts: an application to Asian countries

This article aims to provide new insights into trade effects of the Greater Arab Free Trade Area (GAFTA), using an imperfect competition framework. The model combines the new gravity model approach with supply-demand export equations in imperfect competition. In this regard, the role of scale economies, product varieties and expectations is explored. Facing the lack of international data on scale economies, we also develop a translog production system which makes it possible to obtain reliable estimates of this factor. For a more rigorous treatment of the endogeneity problem in the model, we make use of an instrumental GMM panel estimator. Results show limited effects of GAFTA on regional trade in imperfect competition, due to market segmentation and the predominance of inter-industry trade. In addition, the fitted intra-GAFTA trade values are far beyond the actual ones. This suggests that GAFTA countries could benefit from deeper regional trade integration. In this regard, the Arab Spring creates new opportunities to reinforce trade integration as a means of grasping additional trade gains in this area.     

Money demand income elasticity in advanced and developing countries: new evidence from meta-analysis

This article extends the meta-analysis presented in Knell and Stix (2005, 2006) to investigate the possible sources of variations in empirical findings about the income elasticity of money demand in advanced and developing countries. In the case of advanced countries, we find that the income elasticities of money demand are significantly higher if broader definitions of the monetary aggregates are used. In addition, financial reforms and wealth seem to have significantly reduced the estimates of the income elasticity. However, we achieved quite different findings for the developing countries. It appears that the broader definitions of monetary aggregates seem to produce income elasticity estimates that are only marginally higher than the narrower aggregates. While the wealth (financial reform) impacts on income elasticity are statistically insignificant (weakly significant), both seems to have reduced the income elasticity estimates only marginally. Moreover, some contrasting results between advanced and developing countries are also attained with respect to the proxies of cost of holding money.     

Estimation of Money Demand Function of South Korea Considering Regime Switching

The stability of money demand function is an important issue in macroeconomic policy implementation. Money demand of Korean economy was estimated. Cointegration test with time dummy variables results show that there is not only long-run equilibrium relationship between money demand and macroeconomic variables, but also structural breaks in this equilibrium relationships. Least squares, state-space, and Marcov switching methods show that there also has been instability （or regime shifts） of parameters in money demand, especially over 1997 crisis and the early 2000s. This fact implies that monetary policy for stabilization might encounter big problems due to change （instability） of money demand.     

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.     

Foreign exchange reserves and import demand in a developing economy: the case of Pakistan

Conventional specifications of import demand in LDCs have commonly been plagued by implausible and unstable parameter estimates. This paper shows the importance of imposing long‐run income homogeneity and of including foreign exchange reserves when estimating import demand function for an LDC. Using several cointegration techniques, it is shown that there is one linear relationship among real imports, real income, relative import prices and real foreign exchange reserves. In addition, by employing stability tests for cointegrated systems by Hansen (1992a), the paper shows that only when foreign exchange reserves and long‐run unit‐income homogeneity are accounted for does a constant parameter, long‐run equilibrium relation emerge for Pakistan. Also, the ensuing short‐run dynamic model is constant and data‐coherent. Finally, the study provides information on the speed of adjustment to equilibrium and the median and mean time lags of adjustments of real imports to changes in their determinants. The results indicate a quick response of real imports to changes in their determinants.     

Reassessing forest products demand functions in Europe using a panel cointegration approach

In a panel of European countries, we analyse paper products, sawnwood and wood panels consumption data. With this object, we use a classical demand model where national consumption depends on real GDP and real prices. In contrast to previous panel estimations in the literature, we highlight non-stationarity time series which can lead to spurious regressions. We explicitly take into account the issue by using recent panel cointegration techniques. Cointegration is present for printing paper and fibreboard, though less clear cut for other products. Then we estimate demand elasticities and find that GDP elasticities are significantly lower than estimates from the literature. Finally, we simulate the implications of modified demand elasticities by using a partial equilibrium model of the forest sector. For most products, changes in elasticities would lead to lower projected demand and lower prices over a 20-year time horizon. Lower demand for solid wood and wood fibre would lead to less tensions with fuel wood- and wood-based chemical markets. In a context of rising interest for renewable bio-based products, updated long-term demand models contribute to the analysis of the forest sector’s sustainability.     

M1 demand and volatility

The reasons for the instability within the M1 market during the 1970s and 1980s have been attributed to an actual breakdown in the M1 market, multicollinearity, or an inappropriate specification. The present paper offers a more general reason: increased volatility within the money demand determinants produced an econometric environment which made estimation of the relationship problematic. In order to investigate this possibility, the traditional demand vector is re-estimated with additional generalized autoregressive conditional heteroskedasticity representation for income, inflation, and interest rate volatility as conditioning variables. The rolling regression results highlight a significant stability within the M1 demand vector and its long- and short-run parameters. I wish to thank, without implicating, two anonymous referees for helpful comments and suggestions     

转型经济的货币深化与货币挤出:中国和俄罗斯的不同

通货膨胀是转型经济所要面临的挑战,因此分析转型经济的货币问题十分必要。通过构建货币深化和货币挤出两种不同货币现象的分析框架,并对中国和俄罗斯的现实情况进行比较,可以发现,货币超发并非通货膨胀的充分条件,只要能够控制好货币的流向,引导货币向货币资本转化,就能够防范和治理通货膨胀,以交易方程式和鲍莫尔—托宾模型的实证检验也印证了上述观点。