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Relationship of Fiscal Discipline and Household Income on Money Demand Function in Sri Lanka

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  • Dawood MAMOON

    (University of Management and Technology (UMT), School of Business & Economics, Lahore, Pakistan.)

  • Umbreen IFTIKHAR

    (University of Management and Technology (UMT), School of Business & Economics, Lahore, Pakistan.)

  • Muhammad Shahid HASSAN

    (Department of Economics, School of Business and Economics, University of Management and Technology Lahore, Pakistan.)

Abstract

This paper attempts to find those determinants stirring the function of money demand in Sri Lanka during 1975-2013. The empirical analysis starts from applying the unit root tests i.e. Ng-Perron. We apply ARDL bound testing approach of co-integration to scrutinize the co-integration in variables. We select independent variables like per capita GDP, interest rate, exchange rate, fiscal deficit, urban population and rural population to determine money demand function. The findings revealed that income, interest rate and fiscal deficit effect money demand significantly and positively. The exchange rate affects negatively and significantly upon money demand. The stable money demand function is found over time applying CUSUM and CUSUMSQ stability test. The model of our study strongly recommends the real demand for M2 is vital monetary aggregate in terms of policy implication including the appropriateness of model in Sri Lanka.

Suggested Citation

  • Dawood MAMOON & Umbreen IFTIKHAR & Muhammad Shahid HASSAN, 2017. "Relationship of Fiscal Discipline and Household Income on Money Demand Function in Sri Lanka," Journal of Economics Bibliography, KSP Journals, vol. 4(1), pages 1-9, March.
    • Handle: RePEc:ksp:journ6:v:4:y:2017:i:1:p:1-9
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    References listed on IDEAS

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    1. Muhammad Arshad Khan & Muhammad Zabir Sajjid, 2005. "The Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Approach," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 10(2), pages 87-99, Jul-Dec.
    2. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
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    6. Ben-Salha, Ousama & Jaidi, Zied, 2014. "Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia," The Journal of Economic Asymmetries, Elsevier, vol. 11(C), pages 30-45.
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    8. World Bank, 2012. "World Development Indicators 2012," World Bank Publications - Books, The World Bank Group, number 6014, December.
    9. Paresh Narayan & Seema Narayan & Vinod Mishra, 2009. "Estimating money demand functions for South Asian countries," Empirical Economics, Springer, vol. 36(3), pages 685-696, June.
    10. World Bank, 2013. "World Development Indicators 2013," World Bank Publications - Books, The World Bank Group, number 13191, December.
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    Cited by:

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    2. Gao, Jinchao & Hassan, Muhammad Shahid & Kalim, Rukhsana & Sharif, Arshian & Alkhateeb, Tarek Tawfik Yousef & Mahmood, Haider, 2023. "The role of clean and unclean energy resources in inspecting N-shaped impact of industrial production on environmental quality: A case of high polluting economies," Resources Policy, Elsevier, vol. 80(C).
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    More about this item

    Keywords

    Sri Lanka; Money demand; Income; Interest rate; Exchange rate; Fiscal deficit; Urban and Rural Population.;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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