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.     

The long-run and short-run demand for money: Additional evidence

This paper presents estimates of Chow's money-demand equations using Chow's data. The equations are adjusted for autocorrelation using two autocorrelation transformations, the standard Cochrane-Orcutt transformation that deletes “initial” observations, and one that does not delete these observations. The estimates focus on the question of the asset versus the transactions specifications. The results reaffirm Chow's original conclusion which supported the asset motive and, thereby, reversed nearly all of the findings recently reported by Lieberman (1980). The paper concludes that one should be wary about using the Cochrane-Orcutt transformation, especially when the ratio of the number of deleted observations to total observations is large.     

Financial innovation and demand for money: some empirical evidence

Recent criticism of money growth targets has been based on the implications of spreading financial innovation, since the latter has been considered to undermine monetary policy effectiveness both by bringing about an increase in the interest elasticity of money demand and by producing instability of the money demand function. The empirical results presented in this paper – focusing on a single and specific case of financial innovation particularly suited to study the isssue at stake – falsify both hypotheses.     

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 transactions demand for money in the presence of currency substitution: evidence from Vietnam

Currency substitution – the use of foreign money to finance transactions between domestic residents – is widespread in low income and transition economies. Traditionally, however, empirical models of the demand for money tend to concentrate on the portfolio motive for holding foreign currency, while maintaining the assumption that the income elasticity of demand for domestic money is invariant to the degree of currency substitution. A simple re-specification of the demand for money is offered which more accurately reflects the process of currency substitution by allowing for a variable income elasticity of demand for domestic money. This specification is estimated for Vietnam in the 1990s. Using a standard cointegration framework evidence is found for currency substitution only in the long-run but well-defined wealth effects operating in the short-run.     

Long-run money demand in Taiwan revisited: evidence from a cointegrating STR approach

Economic growth over the past two decades has failed to reduce income inequality. We contend that major reasons for this are the slowdown and bias in technological change (productivity growth). Given the complexity of the many interactions that take place, this phenomenon is best addressed in a general equilibrium context. For this purpose, we have developed a computable general equilibrium (CGE) model with advanced features relating to income distribution. We perform a series of simulations based on recent overall productivity changes, but under various forms of technological change bias, factor mobility, and government budgetary balance. We find the labour-augmenting technological change cases to be most consistent with recent experience.     

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 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.     

Leakages from the money demand function

The performance of alternative scale variables is explored in a simple demand function for narrow money. Sequential test establish consumers' expenditure as the preferred measure. The implications for fiscal policy and the paradox of thrift are outlined.     

Currency demand,new technology,and the adoption of electronic money: Micro evidence from Japan

We estimate currency demand functions conditional on electronic money adoption with household-level survey data from Japan under an Instrumental Quantile Regression framework. Contrary to theoretical predictions, our results suggest that users of electronic money hold more currency than non-users.     

Long-run money demand function in Argentina during 1935–1962: evidence from cointegration and error correction models

This paper provides a study of Argentina's money demand function during 1935–62 and 1946–62. These priods not only involved several important changes in Argentina's economy and banking system but also included high and volatile inflation. Using cointegration tests and error correction moderlling, results shows that even in periods of large variability there exists a stationary long-run demand function for real M1 and real M2 in Argentina. Error Correction models show that there is biddirectional causality between real money stock (M1 and M2) and the rate of inflation in both periods. Real income is found to be exogenous in all relationships. Thus results presented in this paper provide merit to Cagan's form of money demand function during high inflation periods.     

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.     

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.     

The role for openness in the demand for money: Evidence from Barbados

This paper uses an optimizing theoretical framework for modelling openness in the demand for money function for a small, open, developing economy; in so doing, it subsumes the ad hoc specifications of three previous studies. Its findings confirm the importance of a measure of openness in the money demand specification for Barbados. More specifically, it appears that transactions associated with the traded sector of the economy exhibit greater elasticity of money demand than those associated with the nontraded sector.     

Direct effects of money on aggregate demand: another look at the evidence

Now that a number of central banks are faced with short-term nominal interest rates close to or at the zero lower bound, there is a renewed interest in the long-running debate about whether or not changes in the stock of money have direct effects. In particular, do changes in money have additional effects on aggregate demand outside of those induced by changes in short-term nominal interest rates? This article revisits and reinterprets the empirical evidence based on single equation regressions which is quite mixed, with some results supporting and other results denying the existence of direct effects. We use a structural model with no direct effects of money to show that the finding of positive and statistically significant coefficients on real money growth can be misleading. The model generates data that, when used to estimate analogues of the empirical regressions, produce positive and statistically significant coefficients on real money growth, similar to those often found when using actual data. The problem is that single equation regressions leave out a set of variables, which in turn, give rise to an omitted variables bias in the estimated coefficients on real money growth. Hence, they are an unreliable guide to calibrate monetary policies, in general, including at the zero lower bound.     

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.     

Revisiting the demand for money model: money and loans in selected manufacturing industries

Using a dynamic infinite horizon optimizing model, it is shown that the empirical demand for money equation employed by a generation of applied monetary researchers is a reduced form model of the dynamic Euler equations for real money balances. The Euler equations derived in this paper focus on the finance capital for the firm and consist of real money balances (M1) and real business loans (F1) for selected manufacturing industries. By employing explicit structural dynamic specification and sectoral disaggregation, the question of how firms close the gap between desired real money balances and actual real money balances is examined. Model consistent ‘desired’ levels of money balances and business loans are found to depend not only upon the usual transactions variable and interest rate but also upon relative prices and a technology index. Moreover, the speed in closing the gap between desired and actual money balances (loan balances) is estimated using annual two-digit Standard Industrial Code data for durable and non-durable industries. Non-durable industries tend to close the gap faster than durable industries by as much as 25% in a given year.     

Relative prices and the demand for money

This paper examines the validity of the conventional specification of money demand with particular reference to the issue of relative prices. It is shown that the conventional money demand function is based on the assumption of weak separability of money from commodities, which forms the basis for the absence of relative prices in money demand. Empirical and presumptive evidence suggests that weak separability is not tenable, implying that relative prices are important in money demand. The inclusion of commodity prices in money demand significantly affects the interest and income elasticity estimates. Finally, it is noted that the aggregate consumption function excluding commodity prices also has no theoretical and empirical base.     

The demand for money in Austria

In this paper, the demand for real money M1, M2, and M3 is estimated for Austria over the time period 1965–96. The modelling takes place within the framework of a small vector autoregression. To estimate the demand for money, two-equation error-correction models are constructed, which contain the short-run dynamics and the long-run economic equilibrium. It is found that a stable money demand exists for all monetary aggregates. The long-run equilibrium of M1, after accounting for a structural break in 1979, can be characterised as a classical type of money demand, with no interest rate effects and an elasticity of one for real GDP. In the case of M2 and M3, we find a unit coefficient on income and a significantly negative influence of a long-term interest rate. The statistical properties of the estimated short-run money demand equations – considering in-sample and out-of-sample tests – are generally very good. First version received: October 1996/Final version received: April 2000