Revisiting the US money demand function: an application of the Lagrange multiplier structural break unit root test and the bounds test for a long-run relationship

This study has investigated money demand function incorporating financial development, industrial production, income and exchange rate for Pakistan for time span from 1972 to 2012. Bayer–Hanck combined cointegration and Johansen cointegration approaches have been used to test cointegration among variables and vector error correction model (VECM) approach has been applied to explain the direction of causality in the long run and short run. Unit root problem has been tested by augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) unit root tests. The results indicate that feedback effect is found between financial development and money demand. There is a long-run relationship existing among money demand, financial development, income, industrial production and exchange rate. Financial development is the main factor to determine money demand function in both long run and short run.

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The Demand for Money in Nepal: An Analysis Using Vector Error Correction Model

Prithvi Academic Journal ◽

10.3126/paj.v2i0.31502 ◽

2019 ◽

Vol 2 ◽

pp. 10-17

Author(s):

Deepak Neupane

Keyword(s):

Interest Rate ◽

Money Supply ◽

Money Demand ◽

Unit Root ◽

Demand Function ◽

Unit Root Test ◽

Demand For Money ◽

Money Demand Function ◽

Real Gdp ◽

Integration Test

This paper examines the demand for money in Nepal. Accordingly, time series techniques such as Unit Root Test, Co-integration test approach were conducted considering the annual data from 1975 to 2019. The results of the unit root test indicate that the variables are stationary at the first order difference. Moreover, the co-integration test state that there is co-integration among the real broad money supply, real GDP at producer price, inflation and the interest rate, after taking the logs of real broad money supply, real GDP and interest rate and taking the first difference of all the considered variables, which makes the series normal and stationary respectively. Besides the results of the CUSUM test indicate the stability of the model. The results of the VECM show that there exists the long-run causality of the determinants on the money demand function whereas, out of the considered variables, none has the short-run causality on the money demand function. Moreover, ordinary least square method was also conducted to compute the coefficient of parameters which showed that though only one, real GDP, out of three, was found to be significant, the model was found to be good fit with the value of R-squared 0.9933 stating that the 99.33 percent variation in the dependent variable is explained by the explanatory variables.

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The Impact of Financial Innovation on the Money Demand Function: An Empirical Verification in India

Margin The Journal of Applied Economic Research ◽

10.1177/0973801019886479 ◽

2020 ◽

Vol 14 (1) ◽

pp. 28-61 ◽

Cited By ~ 1

Author(s):

Masudul Hasan Adil ◽

Neeraj Hatekar ◽

Pravakar Sahoo

Keyword(s):

Money Demand ◽

Demand Function ◽

Financial Innovation ◽

Jel Classification ◽

Parameter Estimates ◽

Correlated Errors ◽

Bounds Testing ◽

Money Demand Function ◽

Long Run ◽

The Impact

Traditional money demand functions are often criticized for persistent over-prediction, implausible parameter estimates, highly serially correlated errors and unstable money demand. This study argues that some of these problems may have emerged for the lack of factoring financial innovation into the money demand function. This study estimates money demand for India during the post-reform period, from 1996:Q2 to 2016:Q3. The money demand function is estimated with the linear ARDL approach to cointegration developed by Pesaran, Shin, & Smith (2001), Bounds testing approaches to the analysis of level relationships, Journal of Applied Econometrics, 16(3), 289–326, after employing various proxies for financial innovation. In conclusion, the study finds that there is a stable long-run relationship among variables, such as real money balances, and the scale and opportunity cost variables. In a nutshell, the study assesses the relative importance of financial innovation variables in the money demand equation, and finds that financial innovation plays a very significant role in the money demand specification and its stability. JEL Classification: E41, E44, E42, E52, O16, O53

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Demand for Money Function in Case of Philippines: An Empirical Analysis

Research in World Economy ◽

10.5430/rwe.v11n1p220 ◽

2020 ◽

Vol 11 (1) ◽

pp. 220

Author(s):

Chayanan Kerdpitak

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Granger Causality ◽

Money Demand ◽

Demand Function ◽

Time Window ◽

Asset Price ◽

Unit Root Test ◽

Money Demand Function ◽

Macroeconomic Indicators

An effective formulation of monetary policy provides an empirical and coherent model of money related with demand. In order for the monetary authorities to understand the demand for the purpose of money function, the steadiness of money demand is important as it leads towards an application of efficient monetary policy. In order to examine the stability of money demand function of Philippines, following study was conducted with broad money, real asset price index, GDP deflator, real GDP, long-term interest rate and short-term interest rate. For empirical investigation, unit root test, cointegration, and Granger-Causality tests were used. However, the findings of the cointegration suggests that cointegration reveals there is presence of linear combinations, and results shows that there are four cointegrating equations present. Therefore, it is evident that there are at least 4 cointegrating relations between the variables. Hence, some of macroeconomic indicators can be used to predict the broad money due to presence of vector. However, the Granger-Causality shows that no macroeconomic variable granger cause broad money (M1). Therefore, the selected macroeconomic indictors RS, LS, CPI, GDP deflator, RGDP and AP/P cannot be used to predict the variation in the broad money (M1) in case of Philippines. This means the money demand function in Philippines is not stable, and for this purpose further investigation is suggested by increasing sample size and time window in quarterly or semi-annually.

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IN SEARCH OF A STABLE NARROW MONEY-DEMAND FUNCTION FOR INDONESIA, 1970–2007

The Singapore Economic Review ◽

10.1142/s0217590811004109 ◽

2011 ◽

Vol 56 (01) ◽

pp. 61-77

Author(s):

AKHAND AKHTAR HOSSAIN

Keyword(s):

Money Demand ◽

Financial Crises ◽

Demand Function ◽

Structural Break ◽

Annual Data ◽

Test Results ◽

Money Demand Function ◽

Financial Reforms ◽

Deposit Rate ◽

Rolling Regression

This paper adopts the Johansen approach to cointegration to estimate a narrow money-demand function for Indonesia with annual data for the period 1970–2007. Empirical results suggest that there exists a cointegral relationship between real narrow balances, real permanent income and the deposit rate of interest. The recursive and rolling regression results suggest that the narrow money-demand function has remained largely stable irrespective of ongoing financial reforms in Indonesia since the late 1980s and/or financial crises in the late 1990s. The Quandt-Andrews breakpoint and the Hansen-Johansen stability tests results however suggest that the narrow money-demand relationship had a structural break in the early 1990s. This corresponds to a period of time when the banking and financial reforms in Indonesia took effect. The Chow breakpoint test results suggest that there was also a structural break in the money-demand relationship during the financial crises of the late 1990s.

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On the nexus between Stock Market Fluctuations and the Demand for Money in Saudi Arabia

Business and Economic Research ◽

10.5296/ber.v10i1.16231 ◽

2020 ◽

Vol 10 (1) ◽

pp. 142

Author(s):

Moayad Al Rasasi ◽

Fares Rawah ◽

Bander Alghamdi

Keyword(s):

Saudi Arabia ◽

Interest Rate ◽

Money Demand ◽

Stock Prices ◽

Demand Function ◽

Positive Impact ◽

Demand For Money ◽

Money Demand Function ◽

Long Run ◽

Estimated Error

This research paper estimates the augmented money demand function for Saudi Arabia while incorporating stock prices as one of the key determinants and utilizing quarterly data spanning over the period of 2010-2018. The estimated money demand function coincides with theoretical expectation regarding income and interest rate over long run. In Particular, the demand for money is statistically significant and positively related with income while it’s negatively related with interest rate. On stock prices, the findings suggest that they are statistically significant and have positive impact on money demand over the long run. Moreover, the estimated error correction model indicates that it takes money demand about two quarters to adjust to its equilibrium condition.

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