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Some empirical evidence on the demand for money in the Pacific Island countries

  • Rup Singh
  • Saten Kumar
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    Purpose – The purpose of this paper is to analyze narrow money demand functions for the Pacific Island countries (PICs) and evaluate their stability. The selected PICs are Fiji, Vanuatu, Samoa (SAM), Solomons and the Papua New Guinea. The stability of the demand for money is vital for the formulation of the monetary policy. Design/methodology/approach – The augmented Dicky-Fuller method is employed to test the time series properties of the variables. Alternative time series techniques such as general to specific (GETS) and Johansen maximum likelihood (JML) are used with annual data from 1974 to 2004 (except for SAM with data from 1980 to 2004) to estimate the narrow money demand equations. To draw inferences relative to the stability of the parameters, the study applies the cumulative recursive sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ). Findings – The results from the time series approaches of GETS and JML suggest that real income, nominal rate of interest and real narrow money are cointegrated. The CUSUM and CUSUMSQ stability test results indicate that the demand for money functions for these countries are stable and, therefore, the respective monetary authorities may consider targeting money supply in their conduct of monetary policy. It is argued that the financial sector reforms and liberalization is yet to have any significant effects on the money demand in the PICs. Research limitations/implications – The methods of estimation does not allow for structural breaks in the cointegrating relationship. It is hoped that future research may focus on using the structural break techniques and also investigate the stability of the demand for broad money in the PICs. Further due to limitations in the data, the authors were only able to select five PICs. Originality/value – This is the first paper in the literature that provides long-run estimates and stability results of the narrow money demand using the newest time series techniques for a group of PICs over the period 1974-2004.

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    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 27 (2010)
    Issue (Month): 3 (August)
    Pages: 211-222

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    Handle: RePEc:eme:sefpps:v:27:y:2010:i:3:p:211-222
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    1. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    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. B. Bhaskara Rao & Saten Kumar, 2009. "Cointegration, structural breaks and the demand for money in Bangladesh," Applied Economics, Taylor & Francis Journals, vol. 41(10), pages 1277-1283.
    4. Kumar, Saten, 2009. "A Re-examination of Private Consumption in Fiji," MPRA Paper 18706, University Library of Munich, Germany.
    5. Mohsen Bahmani-Oskooee & Hafez Rehman, 2005. "Stability of the money demand function in Asian developing countries," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 773-792.
    6. B Bhaskara Rao & Rup Singh, 2005. "A Cointegration And Error Correction Approach To Demand For Money In Fiji: 1971-2002," Macroeconomics 0511012, EconWPA.
    7. Saten Kumar, 2007. "The Stability of Demand for Money in Bangladesh: Time Series Methods," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(2), pages 27-35, May.
    8. B. Bhaskara Rao & Rup Singh, 2006. "Demand for money for Fiji with PcGets," Applied Economics Letters, Taylor & Francis Journals, vol. 13(15), pages 987-991.
    9. Kumar, Saten & Manoka, Billy, 2008. "Testing the Stability of Demand for Money in Tonga," MPRA Paper 19300, University Library of Munich, Germany.
    10. Saten Kumar, 2008. "Income and Price Elasticities of Exports in Philippines," The IUP Journal of Applied Economics, IUP Publications, vol. 0(6), pages 40-46, November.
    11. Chinna Kannapiran, 2001. "Stability of Money Demand and Monetary Policy in Papua New Guinea (PNG): An Error Correction Model Analysis," International Economic Journal, Taylor & Francis Journals, vol. 15(3), pages 73-84.
    12. Subramanian S. Sriram, 1999. "Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models," IMF Working Papers 99/64, International Monetary Fund.
    13. Rao, B. Bhaskara & Kumar, Saten, 2009. "A panel data approach to the demand for money and the effects of financial reforms in the Asian countries," Economic Modelling, Elsevier, vol. 26(5), pages 1012-1017, September.
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