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Long-run money demand in OECD countries: what role do common factors play?

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  • Frauke Dobnik

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    Abstract

    This article examines the long-run money demand function for 11 OECD countries from 1983Q1 to 2006Q4 using panel data. The distinction between common factors and idiosyncratic components using principal component analysis allows for the detection of cross-member cointegration and the determination as to whether national or international sources are responsible for the non-stationarity of money and its determinants. Indeed, the finding that the common factors are I(1) while the idiosyncratic components are I(0) indicates that cross-member cointegration may exist and non-stationarity in the variables is primarily driven by common international trends. Furthermore, it is found that the impact of income on money demand is positive, whereas it is negative for the interest rate, exchange rate and stock prices. Except for the income elasticity of money demand, all estimated long-run coefficients are larger for the common factors of the variables than for the variables themselves. This article provides evidence that the exchange rate is an important determinant of money demand, whereas the results for the stock prices are ambiguous. Finally, the results of a panel-based error-correction model suggest that several domestic money stocks converge to a common international equilibrium relationship between the common factors. Copyright Springer-Verlag 2013

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    File URL: http://hdl.handle.net/10.1007/s00181-012-0600-6
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    Bibliographic Info

    Article provided by Springer in its journal Empirical Economics.

    Volume (Year): 45 (2013)
    Issue (Month): 1 (August)
    Pages: 89-113

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    Handle: RePEc:spr:empeco:v:45:y:2013:i:1:p:89-113

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    Related research

    Keywords: Money demand; Wealth effects; Panel unit roots; Error-correction models; E41; C22; C33;

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    Cited by:
    1. Ben Salha, Ousama & Jaidi, Zied, 2013. "Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia," MPRA Paper 51788, University Library of Munich, Germany.

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