A re-examination of the demand for money in small developing economies

This paper re-examines the money-demand function in three small open economies of Asia: Korea, Pakistan and Singapore. In addition to using the relatively new procedure of error-correction modelling, the roles of variables such as (a) the expected change in the exchange rate, (b) foregin interest rates, and (c) foreign exchange risks on money demand are examined. In testing the importance of these variables in the money-demand function, special attention is paid to testing the assumptions of the classical linear regression model. The sample period for each country spans from 1973:1 through 1990:1. The empirical results suggest that the error-correction specification performs very well. In addition to the traditional variables, the results suggest that at least some measure of foreign monetary developments appear to have some significant effect on money-demand behaviour in these small developing economies.