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The financial structure and the demand for money in Thailand

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  • Abdur Chowdhury

Abstract

This paper uses recently developed econometric techniques to investigate the demand for money in Thailand. Initial estimates show the absence of any long-term, unique relationship among a monetary aggregate (M1 or M2), an income and a price variable. However, the introduction of an exchange rate in the above relationship shows the presence of a cointegrating relationship. This provides some support to McKinnon's hypothesis of currency substitution. It also raises some concern about the closed-economy focus of earlier studies on money demand in Thailand. Addition of a foreign interest variable to the above models provide some support to the capital mobility hypothesis. The long-run elasticity estimates for the M1 equation raise some doubts about the desirability of using this monetary aggregate as an intermediate target by the Bank of Thailand. The null hypothesis of a unit income elasticity and zero foreign interest elasticity are not rejected, but the hypothesis of price homogeneity is rejected. Moreover, the short-term forecasts of M1 are biased. On the other hand, the long-run elasticities for the M2 equation are within the expected range while the equation itself exhibits structural stability during the sample period and provides unbiased forecasts.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 29 (1997)
Issue (Month): 3 ()
Pages: 401-409

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Handle: RePEc:taf:applec:v:29:y:1997:i:3:p:401-409

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Cited by:
  1. Bredin, Don & Cuthbertson, Keith, 2001. "Money Demand in the Czech Republic since Transition," Research Technical Papers 3/RT/01, Central Bank of Ireland.
  2. Mohsen Bahmani-Oskooee & Hafez Rehman, 2005. "Stability of the money demand function in Asian developing countries," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 773-792.
  3. Kevin S. Nell, 1999. "The Stability of Money Demand in South Africa, 1965-1997," Studies in Economics 9905, Department of Economics, University of Kent.
  4. Sharifi-Renani, Hosein, 2007. "Demand for money in Iran: An ARDL approach," MPRA Paper 8224, University Library of Munich, Germany.
  5. Muhd-Zulkhibri Abdul Majid, 2004. "Reassessing The Stability of Broad Money Demand in Malaysia," Macroeconomics 0405020, EconWPA.
  6. Sahar Bahmani & Ali Kutan, 2010. "How stable is the demand for money in emerging economies?," Applied Economics, Taylor & Francis Journals, vol. 42(26), pages 3307-3318.
  7. Bahmani-Oskooee, Mohsen & Tanku, Altin, 2006. "Black market exchange rate, currency substitution and the demand for money in LDCs," Economic Systems, Elsevier, vol. 30(3), pages 249-263, October.
  8. Tomoe Moore & Christopher Green & Victor Murinde, 2005. "Portfolio Behaviour in a Flow of Funds Model for the Household Sector in India," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 675-702.
  9. Hesse, Heiko, 2007. "Monetary policy, structural break, and the monetary transmission mechanism in Thailand," Policy Research Working Paper Series 4248, The World Bank.
  10. Michaël GOUJON & Sylviane GUILLAUMONT JEANNENEY & Christopher ADAM, 2002. "Currency substitution and the transactions demand for money in Vietnam," Working Papers 200228, CERDI.
  11. Arize, A. C. & Shwiff, Steven S., 1998. "The appropriate exchange-rate variable in the money demand of 25 countries: an empirical investigation," The North American Journal of Economics and Finance, Elsevier, vol. 9(2), pages 169-185, December.
  12. Stephen Dobson & Carlyn Ramlogan, 2001. "Money Demand and Economic Liberalization in a Small Open Economy—Trinidad and Tobago," Open Economies Review, Springer, vol. 12(3), pages 325-339, July.
  13. Arize, Augustine C. & Malindretos, John & Shwiff, Steven S., 1999. "Structural breaks, cointegration, and speed of adjustment Evidence from 12 LDCs money demand," International Review of Economics & Finance, Elsevier, vol. 8(4), pages 399-420, November.
  14. Baharumshah, Ahmad Zubaidi & Mohd, Siti Hamizah & Yol, Marial Awou, 2009. "Stock prices and demand for money in China: New evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 171-187, February.
  15. Mansor Ibrhim, 2001. "Financial Factors and the Empirical Behavior of Money Demand: A Case Study of Malaysia," International Economic Journal, Taylor & Francis Journals, vol. 15(3), pages 55-72.
  16. James, Gregory A., 2005. "Money demand and financial liberalization in Indonesia," Journal of Asian Economics, Elsevier, vol. 16(5), pages 817-829, October.

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