Economic uncertainty, precautionary motive and the augmented form of money demand function
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A notable feature of empirical research on the inclusion of the economic uncertainty in the money demand function is that very few published papers rely on the specifications with formal clarity by studying the response of precautionary demand for money to changes in economic uncertainty. To overcome this shortcoming, this study uses the augmented form to specify the demand for money function and examines the empirical validity based on a sample of eleven countries, including four developed countries and seven developing countries. Using the panel error-correction technique, the findings provide some policy implications; the augmented form of money demand function can characterize the difference between the three primary motives of money demand—the precautionary motive, the transactions motive and the speculative motive, and support the choice of narrow money as a guide for monetary policy that ensures that economic agents have enough money to meet unexpected expenses triggered by economic uncertainty and helps to fine-tune the interest rate misalignment and output disruption that eventually improves the effectiveness of monetary policy.
KeywordsDynamic heterogeneous panel Economic uncertainty Grid search algorithm Money demand Precautionary motive
JEL ClassificationC23 C61 E41 E52 E61
The author is grateful to the anonymous referees for their helpful comments and suggestions. The author would like to thank Professor Dr. Takatoshi Ito from the Columbia University for his insightful comments. Any remaining errors are, of course, my sole responsibility. Funding: This work was supported by the Research Management and Innovation Centre, Sultan Idris Education University and the Ministry of Higher Education, Malaysia, through the Fundamental Research Grant Scheme [2016-0214-106-41].
This study was funded by the Research Management and Innovation Centre, Sultan Idris Education University and the Ministry of Higher Education, Malaysia (grant number 2016-0214-106-41).
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Conflict of interest
The manuscript has no conflict of interest including funding source and/or any entity.
The manuscript is the author’s original work. The article has not received prior publication and is not under consideration for publication elsewhere.
The manuscript does not contain any studies with human participants or animals performed by author.
For this type of study informed consent is not required.
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