The financial sector reforms implemented by the Central Bank of Kenya (CBK) resulted in rapid financial innovation (such as the popular M-Pesa mobile money services) growth, and expansion of several interest earning financial instruments. These developments affect the definition and composition of monetary aggregates, posing a question on the correctness of the current money measures used by CBK. The simple sum aggregates were identified with several theoretical and empirical shortcomings. The rapid financial sector development might affect the stability of money demand function. This study constructs Divisia monetary aggregates for Kenya over the period of 2000's first quarter to 2015's third quarter and applies the ARDL method in investigating the stability of money demand function. For the first time, monetary uncertainty and output uncertainty variables are introduced to the Kenyan money demand model. The results reveal that both monetary and output uncertainty has significant influence on money demand in Kenya. This implies that omitting the two variables in the Kenya money demand function might lead to a wrong specification. The money demand function is stable over the period. It means that monetary aggregates targeting is the right framework for monetary policy formulation by the CBK.Contribution/ Originality: This study constructs Divisia monetary aggregates for Kenya over the period of 2000's first quarter to 2015's third quarter and applies the ARDL method in investigating the stability of money demand function.
The relationship between exchange rate and money demand has long been debated among macroeconomists due to its impact on the stability of money demand and monetary policy. Following the significant depreciation in the currency exchange associated with the political instability in Malaysia in recent years, examining the relationship between exchange rate and money demand is crucial to ensure the monetary policy remains prudent. This study examined the asymmetric impact of exchange rate changes on money demand in Malaysia using both linear and nonlinear ARDL approaches. The findings reveal that the money demand responds asymmetrically to exchange rate changes both in the short and long run, whereby the response to a negative shock (local currency depreciation) outweighs the positive shock (local currency appreciation). The result also suggests that the substitution effects dominate the exchange rate and money demand relationship. Consequently, with the economic and political instability continuing, the currency exchange is expected to depreciate further, contributed by the strong substitution effects. This will greatly affect the stability of money demand and the monetary policy and thereby call upon a policy intervention to strengthen the currency exchange and sustain the long-run economic performance.
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