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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 periods 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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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 158.

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Date of creation: 20 Sep 2003
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Handle: RePEc:qut:dpaper:158

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Web page: http://www.bus.qut.edu.au/faculty/economics/
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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. 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.
  2. Jose De Gregorio & Peter Wickham & Patricio Arrau & Carmen Reinhart, 1991. "The Demand for Money in Developing Countries: Assessing the Role of Financial Innovation," IMF Working Papers 91/45, International Monetary Fund.
  3. 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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  5. 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.
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  8. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
  9. 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.
  10. Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc.
  11. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Working Papers 99-5, Bank of Canada.
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  14. 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.
  15. 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.
  16. Bob Traa, 1991. "Money Demand in the Netherlands," IMF Working Papers 91/57, International Monetary Fund.
  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. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
  19. 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.
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Cited by:
  1. Kumar, Saten, 2011. "Financial reforms and money demand: Evidence from 20 developing countries," Economic Systems, Elsevier, vol. 35(3), pages 323-334, September.
  2. 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.
  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. 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.
  5. Saten Kumar & Mamta B. Chowdhury & B. Bhaskara Rao, 2013. "Demand for money in the selected OECD countries: a time series panel data approach and structural breaks," Applied Economics, Taylor & Francis Journals, vol. 45(14), pages 1767-1776, May.

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