The impact of economic uncertainty, stock market uncertainty and monetary uncertainty on money demand in India

Abstract

PurposeThe purpose of the paper is to address money demand instability and investigate the impact of economic uncertainty, stock market uncertainty and monetary uncertainty on money demand in India over the period 2003Q1–2019Q4.Design/methodology/approachThe study checks the stationarity of the variables through standard unit root tests. Based on the mixed order of variables' integration, the authors adopt the autoregressive distributed lag (ARDL) model to confirm the cointegration and check the stability of the money demand function (MDF).FindingsThe findings confirm the presence of cointegration and reveal a well-specified MDF, which exhibits stable parameters. Besides the conventional variables, all forms of uncertainties emerge as the essential long-term determinants of money demand. Long-run findings show that people demand more money to avoid the future financial crunch amid high economic, monetary and stock market uncertainties.Practical implicationsThe paper recommends, based on the findings, incorporating the monetary aggregates in the monetary policy framework as one of the essential information variables to control the fluctuation in the price level under the current flexible inflation targeting (FIT) regime.Social implicationsThe findings also add to the knowledge of economic agents in terms of the overall response of individuals to changes in different forms of uncertainties, thereby helping to formulate their portfolios more diligently.Originality/valueThe current work is the first of its kind in the Indian context. The incorporation of uncertainty measures in the MDF adds to the existing knowledge on money demand.

How agricultural technologies and climatic factors affect India's crop production? A roadmap towards sustainable agriculture

“…First, whether the scrutinized variables are integrated of order zero { I (0)}, one { I (1)}, or both, the model may be used to determine the cointegration relationship. Second, statistically, in the case of small samples, the ARDL technique is most commonly used (Khan et al, 2021). The Johansen and Juselius (JJ) cointegration approach is a key technique for determining the cointegration connection (Pesaran et al, 2001).…”

The Effect of Policy Uncertainty on Money Demand in CEMAC Countries

“…Choudhry (2023) finds for the UK that uncertainty is indispensable for the stability of the money demand function and negatively affects the M0 and M3 aggregates. Khan et al (2023) study the impact of different forms of uncertainty (economic uncertainty, stock market uncertainty and monetary uncertainty) on the demand for money in India using quarterly data for the period 2003-2019. The results indicate that all three forms of uncertainty are long-term determinants of money demand.…”

Economic policy uncertainty and the UK demand for money: evidence from the inter-war period

“…8. Ozdemir and Saygili (2013) and Khan et al (2021) provide a list of money demand studies that employ economic uncertainty.…”

“…There has been a recent revival in studies investigating the effect of economic uncertainty on the economy and volatilities (see Leblang and Bernhard, 2006;Bialkowski et al, 2008;Julio and Yook, 2012;Boutchkova et al, 2012;Colombo, 2013;Bernal et al, 2016;Boumparis et al, 2017, Kang et al, 2017. The influence of economic uncertainty on the demand for money has also received considerable attention (see Bahmani-Oskooee and Nayeri, 2020;Bahmani-Oskooee and Xi, 2011;Bahmani-Oskooee et al, 2013Ozdemir and Saygili, 2013;Khan et al, 2021;Gan et al, 2015). This paper extends the literature by empirically investigating the effect of economic policy uncertainty (EPU) (as a proxy for economic uncertainty) on the stability of the UK money demand during the inter-war period (1920)(1921)(1922)(1923)(1924)(1925)(1926)(1927)(1928)(1929)(1930)(1931)(1932)(1933)(1934)(1935)(1936)(1937)(1938).…”

“…, 2017). The influence of economic uncertainty on the demand for money has also received considerable attention (see Bahmani-Oskooee and Nayeri, 2020; Bahmani-Oskooee and Xi, 2011; Bahmani-Oskooee et al ., 2013, 2015; Ozdemir and Saygili, 2013; Khan et al ., 2021; Gan et al ., 2015). This paper extends the literature by empirically investigating the effect of economic policy uncertainty (EPU) (as a proxy for economic uncertainty) on the stability of the UK money demand during the inter-war period (1920–1938).…”