The Impact of Banking Crises on Money Demand and Price Stability

Abstract

Martinez Peria empirically investigates the monetary Overall, she finds no systematic evidence that ba.kieg impact of banking crises in Chile, Colombia, Denmark, crises cause money demand instability. Nor do trie resulLs Japan, Kenya, Malaysia, and Uruguay. She uses consistently support the notion that the relationship cointegration analysis and error correction modeling to between monetary indicators aind prices undcr,oes research: structural breaks during crises. Howevert altheolugi * Whether money demand stability is threatened by individual coefficients in price equations do nct seem,-o banking crises. be severely affected by crises, crises can soeneti ines gim t * Whether crises bring about structural breaks in the rise to variance instability in price or inflation ;-qations. relationship between monetary indicators and prices. This paper-a product of Finance, Development Research Group-is part of a larger effort in the group to study bankmng crises. The study was funded by the Bank's Research Support Budget under the research project "Monetary Policy aind Monetary Indicators during Banking Crises" (RPO 683-24). Copies of this paper are available free from the World Bank,

Tests of different monetary aggregates for the monetary models of the exchange rate in five ASEAN countries

“…3 Since the building blocks of monetary model are money demand equations and PPP, it is worth mentioning some of these literatures in lending support to the validity of monetary model. Employing the cointegration techniques, Chowdhury (1997); Dekle and Pradhan (1997); Tan (1997); Arize and Shwiff (1998); Arize et al (1999); Sriram (1999); Azali et al (2000) and Peria (2002) supported the long-run money demand equation for ASEAN-5. Earlier studies by Phylaktis and Kassimatis (1994) and Manzur and Ariff (1995) showed that the PPP relationship holds in the long run for ASEAN.…”

Economic uncertainty and money demand stability in Turkey

“…They find that the Asian crisis did not have a significant impact on the cointegration relationship between money demand and its determinants. Similarly, Peria (2002) reports evidence that banking crises did not cause money demand instability in Chile, Colombia, Denmark, Japan, Kenya, Malaysia and Uruguay. Another group of studies on developing countries has shown that instability in money demand function is mainly due to an omitted variable, exchange rate, in the estimated equations.…”

“…In the US the missing money episode in the late 1970s and the following abnormal behavior of the velocity of M1, which cannot be explained by standard money demand models, are the main reasons why the FED has opted to reduce the role of monetary aggregates in its monetary policy (Baba et al , 1992; Choi and Oh, 2003). Although the results are mixed in the case of emerging market economies (Dekle and Pradhan, 1997; Peria, 2002; Çatık, 2006; Civcir, 2003), the monetary authorities of these countries put greater weight on studies that find instabilities in the money demand functions and use them as an excuse to formulate alternative monetary regimes in which monetary aggregates play no role.…”