The Stability of Broad Money Demand (M3) in South Africa: Evidence from a Shopping-Time Technology and an ARDL Model

The paper examines the relationship of South African broad money (M3) and a set of variables such as income, opportunity cost of holding money (domestic and foreign interest rates), inflation, and stock market prices using a shopping-time technology model from [1] and [49]. The empirical evidence employs an ARDL model to test for a stable long-run relationship between M3 and its determinants. With cointegration established, we estimate an error-correction model that reveals how short-run dynamics adjust towards a long-run equilibrium. There are four important results for broad money in South Africa. First, there is cointegration between M3 and its determinants – income, foreign interest rates, inflation, and real stock market prices. Second, stock prices are an important determinant since cointegration fails if real stock prices are left out. Third, contrary to some of the received literature, the inclusion of an exchange rate in addition to stock prices causes most coefficients to be insignificant. More importantly, demand for M3 becomes unstable. Finally, a dummy variable that captures the introduction of inflation targeting introduced in 2000Q2 is insignificant. This irrelevance of inflation targeting in a money demand function remains whether we employ real stock prices or stock returns as one of the determinants of money demand.