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Modelling the Demand for Money in Sub-Saharan Africa (SSA)

  • Afees Salisu

    ()

    (Department of Economics, University of Ibadan)

  • Idris Ademuyiwa

    ()

    (Department of Economics, University of Ibadan)

  • Basiru Fatai

    ()

    (Department of Economics, University of Ibadan)

In this paper, we extend the work of Hamori (2008) to include three main innovations: (i) we consider an open economy version of money demand which is more representative for small open economies like those in SSA; (ii) we consider both the homogenous and heterogeneous panel cointegration methods to estimate the money demand function in SSA; and (iii) we consider specific analyses for the prominent sub-regions in SSA namely, East Africa, South Africa, Central Africa and West Africa in order to further validate the choice of heterogeneous panel cointegration for modelling money demand in SSA. We find a cointegrating relationship among money demand, income, price level, exchange rate and interest rate in SSA and thus, the consideration of an open economy version is fundamental when modelling money demand in SSA. The specific regressions for the sub-regional units in SSA indicate the existence of heterogeneity in regression estimates. Thus, the consideration of heterogeneous panel cointegration method is valid and ignoring this heterogeneity feature when modelling money demand for SSA countries may yield biased and inconsistent results.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 33 (2013)
Issue (Month): 1 ()
Pages: 635-647

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Handle: RePEc:ebl:ecbull:eb-12-00498
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