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Financial progress and the stability of long-run money demand: Implications for the conduct of monetary policy in emerging economies

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  • Darrat, Ali F.
  • Al-Sowaidi, Saif S.
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    Abstract

    This paper examines whether recent financial changes in three emerging market economies in the Gulf region (Bahrain, the UAE, and Qatar) have distorted the character and the stability of their underlying long-run money demand relations. Money demand instability prompts concerns about the appropriateness of targeting monetary aggregates and could weaken the presumed link between monetary policy and its ultimate objectives. Our results suggest that the quick pace of financial changes in the three emerging market economies did not cause undue shifts in their equilibrium money demand relations. Further evidence from direct tests of cointegration stability indicates the superiority of targeting M1 in the UAE and M2 for Qatar. In Bahrain, both M1 and M2 prove equally appropriate to guide monetary policy. Thus, despite the wave of financial developments that have recently swept the three Gulf economies, the evidence suggests that monetary authorities in these countries should maintain a close watch on monetary growth as a principal policy guide.

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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 18 (2009)
    Issue (Month): 3 (August)
    Pages: 124-131

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    Handle: RePEc:eee:revfin:v:18:y:2009:i:3:p:124-131

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    Web page: http://www.elsevier.com/locate/inca/620170

    Related research

    Keywords: Financial development Money demand instability Monetary policy Cointegration GCC region;

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    Cited by:
    1. Syed Basher & Stefano Fachin, 2012. "Investigating Long-Run Demand for Broad Money in the Gulf Arab Countries," DSS Empirical Economics and Econometrics Working Papers Series 2012/6, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.

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