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Where Has All the Money Gone? Wealth and the Demand for Money in South Africa †

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  • Stephen G. Hall
  • George Hondroyiannis
  • P.A.V.B. Swamy
  • George S. Tavlas

Abstract

After an upward trend for about 25 years, the income velocity of money in South Africa reversed its course in 1994 and began a steep decline that continues to the present day. Some writers have argued that the change in income velocity is symptomatic of an unstable demand for money. The implication of this argument being that movements in the money supply provide little useful information about medium-to-long-term inflationary developments. We argue otherwise. Our basic premise is that there is a stable demand-for-money function but that the models that have been used to estimate South African money demand are not well specified because they do not include a measure of wealth. Using two empirical methodologies--a co-integrated vector equilibrium correction approach and a time-varying coefficient approach--we find that a demand-for-money function that includes wealth is stable. Consequently, our results suggest that the present practice of the South African Reserve Bank whereby M3 is used as an information variable in the Bank's inflation-targeting framework is well placed. Copyright 2009 The author 2008. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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  • Stephen G. Hall & George Hondroyiannis & P.A.V.B. Swamy & George S. Tavlas, 2009. "Where Has All the Money Gone? Wealth and the Demand for Money in South Africa †," Journal of African Economies, Centre for the Study of African Economies, vol. 18(1), pages 84-112, January.
    • Handle: RePEc:oup:jafrec:v:18:y:2009:i:1:p:84-112
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    1. Stephen G. Hall & Heather D. Gibson & G. S. Tavlas & Mike G. Tsionas, 2020. "A Monte Carlo Study of Time Varying Coefficient (TVC) Estimation," Computational Economics, Springer;Society for Computational Economics, vol. 56(1), pages 115-130, June.
    2. Hall, Stephen G. & Swamy, P. A. V. B. & Tavlas, George S., 2017. "Time-Varying Coefficient Models: A Proposal For Selecting The Coefficient Driver Sets," Macroeconomic Dynamics, Cambridge University Press, vol. 21(5), pages 1158-1174, July.
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    4. Mehrotra, Aaron & Ponomarenko, Alexey, 2010. "Wealth effects and Russian money demand," BOFIT Discussion Papers 13/2010, Bank of Finland, Institute for Economies in Transition.
    5. Sambulo Malumisa, 2015. "Structural Breaks, Stability and Demand for Money in South Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 7(5), pages 79-90.

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