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Stability of demand for money function in Nepal: A cointegration and error correction modeling approach

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  • Bhatta, Siddha Raj

Abstract

This paper examines the long run and short run demand for money functions and their stability issues for Nepal using the annual data set of 1975-2009 by using the recently developed ARDL modeling to cointegration popularized by Pesaran and Shin (1999). The bounds test shows that there exists the long run cointgrating relationship among demand for real money balances, real GDP and interest rate in case of both narrow and broad monetary aggregates. Further, the CUSUM and CUSUMSQ test reveal that both the long run narrow and broad money demand functions are stable. The results show that demand for real money balance in Nepal is a stable and predictable function of a few variables and the central bank can rely on the monetary aggregates as intermediate targets for achieving the broad economic objectives.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41404.

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Date of creation: 11 Apr 2011
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Handle: RePEc:pra:mprapa:41404

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Keywords: money demand function; cointegration; error correction modeling;

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  1. Omer, Muhammad, 2009. "Stability of money demand function in Pakistan," MPRA Paper 35306, University Library of Munich, Germany.
  2. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, Elsevier, vol. 16(1), pages 121-130, May.
  3. Birendra Bahadur Budha, 2011. "An Empirical Analysis of Money Demand Function in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, Nepal Rastra Bank, Research Department, vol. 23(1), pages 54-70, April.
  4. den Butter, F. A. G. & Fase, M. M. G., 1981. "The demand for money in EEC countries," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(2), pages 201-230.
  5. Samreth, Sovannroeun, 2008. "Estimating Money Demand Function in Cambodia: ARDL Approach," MPRA Paper 16274, University Library of Munich, Germany, revised Jun 2009.
  6. Robert Simmons, 1992. "An Error-correction Approach to Demand for Money in Five African Developing Countries," Journal of Economic Studies, Emerald Group Publishing, Emerald Group Publishing, vol. 19(1), pages 29-47, January.
  7. Michael J. Hamburger, 1966. "The Demand for Money by Households, Money Substitutes, and Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 74, pages 600.
  8. repec:nrb:journl:v:23:y:2011:i:1:p:4 is not listed on IDEAS
  9. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198288107, October.
  10. Arango, Sebastian & Ishaq Nadiri, M., 1981. "Demand for money in open economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 7(1), pages 69-83.
  11. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  13. Yash P. Mehra, 1991. "An error-correction model of U.S. M2 demand," Economic Review, Federal Reserve Bank of Richmond, issue May, pages 3-12.
  14. Akinlo, A. Enisan, 2006. "The stability of money demand in Nigeria: An autoregressive distributed lag approach," Journal of Policy Modeling, Elsevier, Elsevier, vol. 28(4), pages 445-452, May.
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