Long-run estimates of money demand: new evidence from East Asian countries and the presence of structural breaks

Abstract

Conventionally, the money demand function is estimated using a linear regression of the logarithm of money demand on a number of variables. In this article, we aim to estimate the long-run properties of money demand specification for a number of East Asian economies and within a panel framework with the presence of structural breaks. Various country-specific coefficients are allowed to capture inter-country heterogeneities. Consistent with theoretical postulates, it is found that (a) the demand for money in the long-run positively responds to real income and inversely to the interest rate spread, inflation, the real effective exchange rate and the US real interest rate; (b) the long-run income elasticity is greater than unity; and (c) both the currency substitution and capital mobility hypotheses hold. The empirical findings in this article can provide useful policy guidelines to the East Asian countries' central banks in their quest for price stability. If one of the primary objectives of these countries is to minimize price instability, they should avoid creating unnecessary disequilibrium in the money market, while the employment of cointegration with the presence of structural breaks clearly recommends to central banks to use the supply of money to attain price and macroeconomic stability.

Effects of Money Demand on Trade Balance in Nigeria

“…where the variables logTB is the logarithm of trade balance to capture the effects of transactions and precautionary demand for money on the external sector; log-MD is the logarithm of money demand (the stock of nominal money), i.e. the value of total money in circulation in the Nigerian economy in a given period; RES is the Nigerian international reserves; IR is the deposit interest rate (the interest rate on money itself), RL is the lending interest rate (a proxy for the rate of return on assets outside of money); OPEN is the degree of openness to international trade, measured as (Export + Import)/GDP; logY is the real GDP as a proxy to capture transactions and precautionary demand for money; P is the domestic price level (Apergis, 2015).…”