We construct an aggregate data panel for the GCC's six countries and verify the cointegration hypothesis among the variables of the money demand function using Pedroni's heterogeneous panel cointegration tests (2001). Then, we estimate the idiosyncratic, panel and group-mean cointegrating vectors using FMOLS and a modified version of FMOLS developed by Pedroni (2000). We find strong evidence of cointegration amongst our variables. The estimated elasticities have the expected signs in general but are significant only in the case of the scale variable. Unlike previous studies, we find a significant negative the semi elasticity of money demand with respect to interest rate when we allow for heterogeneity amongst our panel's members.
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Paper provided by Department of Economics, College of Business and Economics, UAE University in its series Economics Working Papers with number
03/04-01.
Find related papers by JEL classification: C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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