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Financial progress and the stability of long-run money demand: Implications for the conduct of monetary policy in emerging economies


  • Darrat, Ali F.
  • Al-Sowaidi, Saif S.


This paper examines whether recent financial changes in three emerging market economies in the Gulf region (Bahrain, the UAE, and Qatar) have distorted the character and the stability of their underlying long-run money demand relations. Money demand instability prompts concerns about the appropriateness of targeting monetary aggregates and could weaken the presumed link between monetary policy and its ultimate objectives. Our results suggest that the quick pace of financial changes in the three emerging market economies did not cause undue shifts in their equilibrium money demand relations. Further evidence from direct tests of cointegration stability indicates the superiority of targeting M1 in the UAE and M2 for Qatar. In Bahrain, both M1 and M2 prove equally appropriate to guide monetary policy. Thus, despite the wave of financial developments that have recently swept the three Gulf economies, the evidence suggests that monetary authorities in these countries should maintain a close watch on monetary growth as a principal policy guide.

Suggested Citation

  • Darrat, Ali F. & Al-Sowaidi, Saif S., 2009. "Financial progress and the stability of long-run money demand: Implications for the conduct of monetary policy in emerging economies," Review of Financial Economics, Elsevier, vol. 18(3), pages 124-131, August.
  • Handle: RePEc:eee:revfin:v:18:y:2009:i:3:p:124-131

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    References listed on IDEAS

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    Cited by:

    1. Folarin, Oludele & Asongu, Simplice, 2017. "Financial liberalization and long-run stability of money demand in Nigeria," MPRA Paper 81190, University Library of Munich, Germany.
    2. Helmi Hamdi & Ali Said & Rashid Sbia, 2015. "Empirical Evidence on the Long-Run Money Demand Function in the Gulf Cooperation Council Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 603-612.
    3. Lydia Ndirangu & Esman Morekwa Nyamongo, 2015. "Financial Innovations and Their Implications for Monetary Policy in Kenya," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 24(suppl_1), pages 46-71.
    4. Zahra Rouhani & Mehdi Behname & Sayed Mahdi Mostafavi, 2013. "A Comparative Study For Opportunity Cost Of Holding Money Between Selected Developing And Developed Countries," Romanian Economic Business Review, Romanian-American University, vol. 8(4), pages 7-17, december.
    5. Syed Basher & Stefano Fachin, 2012. "Investigating Long-Run Demand for Broad Money in the Gulf Arab Countries," DSS Empirical Economics and Econometrics Working Papers Series 2012/6, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    6. C├ęsar Carrera & Jairo Flores, 2017. "Modelling and forecasting money demand: divide and conquer," Working Papers 2017-91, Peruvian Economic Association.


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