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Demand for M2 in Developing Countries: An Empirical Panel Investigation

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  • Abbas Valadkhani
  • Mohammad Alauddin

Abstract

A significant body of literature on developed countries support the view that disequilibrium in the money market can affect the future output gap and/or inflation. This paper examines the major determinants of the demand for real money balances in eight developing countries for which consistent annual time series data are available. Pooling cross-country and time series data for the 1979-1999 period and employing the seemingly unrelated regression (SUR) estimation technique, this paper models a standard money demand function. Various country-specific coefficients are allowed to capture inter-country heterogeneities. Consistent with theoretical postulates, this paper finds that the demand for money positively responds to an increase in real income and negatively to a rise in the interest rate spread, the rate of inflation and the US long-term interest rate. This study supports the hypothesis that disequilibrium in the money market can exacerbate inflation and widen the output gap.

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File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2003/DP%20149%20Valadkhani.pdf
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Bibliographic Info

Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 149.

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Date of creation: 20 Jul 2003
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Handle: RePEc:qut:dpaper:149

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Keywords: Demand for Money; Money and Interest Rate Spread; Panel Data;

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References

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  1. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
  2. Robert Simmons, 1992. "An Error-correction Approach to Demand for Money in Five African Developing Countries," Journal of Economic Studies, Emerald Group Publishing, vol. 19(1), pages 29-47, January.
  3. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
  4. Mohsin S. Khan & Pierre-Richard Agénor, 1992. "Foreign Currency Deposits and the Demand for Money in Developing Countries," IMF Working Papers 92/1, International Monetary Fund.
  5. Gupta, K. L. & Moazzami, B., 1989. "Demand for money in Asia," Economic Modelling, Elsevier, vol. 6(4), pages 467-473, October.
  6. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
  7. Pierre L. Siklos & Andrew G. Barton, 2001. "Monetary aggregates as indicators of economic activity in Canada: empirical evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 1-17, February.
  8. Reinhart, Carmen & Arrau, Patricio & DeGregorio, Jose & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," MPRA Paper 14096, University Library of Munich, Germany.
  9. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  10. Mohsen Bahmani-Oskooee & Miquel-Angel Galindo Martin & Farhang Niroomand, 1998. "Exchange rate sensitivity of the demand for money in Spain," Applied Economics, Taylor & Francis Journals, vol. 30(5), pages 607-612.
  11. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, vol. 91(2), pages 258-262, May.
  12. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  13. Neil R. Ericsson, 1998. "Empirical modeling of money demand," Empirical Economics, Springer, vol. 23(3), pages 295-315.
  14. Andreas Beyer, 1998. "Modelling money demand in Germany," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(1), pages 57-76.
  15. Felmingham, Bruce & Zhang, Qing, 2001. "The Long Run Demand For Broad Money in Australia Subject to Regime Shifts," Australian Economic Papers, Wiley Blackwell, vol. 40(2), pages 146-55, June.
  16. Wong, Chorng-huey, 1977. "Demand for money in developing countries : Some theoretical and empirical results," Journal of Monetary Economics, Elsevier, vol. 3(1), pages 59-86, January.
  17. Abdur Chowdhury, 1995. "The demand for money in a small open economy: The case of Switzerland," Open Economies Review, Springer, vol. 6(2), pages 131-144, April.
  18. Bahmani-Oskooee, Mohsen & Shabsigh, Ghiath, 1996. "The demand for money in Japan: Evidence from cointegration analysis," Japan and the World Economy, Elsevier, vol. 8(1), pages 1-10, March.
  19. Laidler, David, 1991. "The Quantity Theory Is Always and Everywhere Controversial--Why?," The Economic Record, The Economic Society of Australia, vol. 67(199), pages 289-306, December.
  20. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Working Papers 99-5, Bank of Canada.
  21. Jane Haltmaier, 2001. "The use of cyclical indicators in estimating the output gap in Japan," International Finance Discussion Papers 701, Board of Governors of the Federal Reserve System (U.S.).
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  23. Bob Traa, 1991. "Money Demand in the Netherlands," IMF Working Papers 91/57, International Monetary Fund.
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Cited by:
  1. Kumar, Saten & Chowdhury, Mamta & Rao, B. Bhaskara, 2010. "Demand for Money in the Selected OECD Countries: A Time Series Panel Data Approach and Structural Breaks," MPRA Paper 22204, University Library of Munich, Germany.
  2. Singh, Rup & Kumar, Saten, 2007. "Application of the Alternative Techniques to Estimate Demand for Money in Developing Countries," MPRA Paper 19295, University Library of Munich, Germany.
  3. Afees Salisu & Idris Ademuyiwa & Basiru Fatai, 2013. "Modelling the Demand for Money in Sub-Saharan Africa (SSA)," Economics Bulletin, AccessEcon, vol. 33(1), pages 635-647.
  4. Frauke Dobnik, 2011. "OLong-run Money Demand in OECD Countries – Cross-Member Cointegration," Ruhr Economic Papers 0237, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  5. Kumar, Saten, 2011. "Financial reforms and money demand: Evidence from 20 developing countries," Economic Systems, Elsevier, vol. 35(3), pages 323-334, September.

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