Skip to main content

Advertisement

SpringerLink
Log in

Estimating money demand functions for South Asian countries

  • Original Paper
  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

In this paper, we estimate a money demand function for a panel of five South Asian countries. We find that the money demand and its determinants, namely real income, real exchange rate and short-term domestic and foreign interest rates are cointegrated both for individual countries as well as for the panel, and panel long-run elasticities provide robust evidence of statistically significant relationships between money demand and its determinants. Our test for panel Granger causality suggests short-run causality running from all variables, except foreign interest rate, to money demand, and we find evidence that except for Nepal money demand functions are stable.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Ahking FW (2002) Model mis-specification and Johansen’s co-integration analysis: an application to the US money demand. J Macro 24: 51–66

    Article  Google Scholar 

  • Bahmani-Oskooee, Rehman H (2005) Stability of money demand function in Asian developing countries. Appl Econ 37: 773–792

    Article  Google Scholar 

  • Bai J, Perron P (1998) Estimating and testing linear models with multiple structural changes. Econometrica 66: 47–78

    Article  Google Scholar 

  • Bai J, Perron P (2003) Computation and analysis of multiple structural change models. J Appl Econom 18: 1–22

    Article  Google Scholar 

  • Blanchard OJ, Quah D (1989) The dynamic effects of aggregate demand and supply disturbances. Am Econ Rev 79: 655–673

    Google Scholar 

  • Calza A, Sousa J (2003) Why has broad money demand been more stable in the Euro area than in other economies? A literature review, European Central Bank Working Paper Series No.261

  • Caner M, Hansen BE (2001) Threshold autoregression with a unit root. Econometrica 69: 1555–1596

    Article  Google Scholar 

  • Dekle R, Pradhan M (1997) Financial liberalisation and money demand in ASEAN countries: implications for monetary policy. IMF Working Paper 97/36. IMF, Washington

  • Duca JV (1995) Should bond funds be added to M2. J Bank Financ 19: 131–152

    Article  Google Scholar 

  • Friedman M, Schwartz AJ (1963) A monetary history of the United States, 1867–1960. Princeton University Press, Princeton

    Google Scholar 

  • Hamori N, Hamori S (1999) Stability of the money demand function in Germany. Appl Econ Lett 6: 329–332

    Article  Google Scholar 

  • Hamori S, Tokihisa A (2001) Seasonal cointegration and the money demand function: some evidence from Japan. Appl Econ Lett 8: 305–310

    Article  Google Scholar 

  • Hansen B (1992) Tests for parameter instability in regressions with I(1) processes. J Bus Econ Stat 10: 321–335

    Article  Google Scholar 

  • Harb N (2004) Money demand function: a heterogenous panel application. Appl Econ Lett 11: 551–555

    Article  Google Scholar 

  • Hoque A, Al-Mutairi N (1996) Financial deregulation, demand for narrow money and monetary policy in Australia. Appl Financ Econ 6: 301–305

    Article  Google Scholar 

  • Hueng CJ (1998) The demand for money in an open economy: some evidence for Canada. North Am J Econ Financ 9: 15–31

    Article  Google Scholar 

  • Khalid AM (1999) Modelling money demand in open economies: the case of selected Asian countries. Appl Econ 31: 1129–1135

    Article  Google Scholar 

  • King R, Plosser C, Stock JH, Watson MW (1991) Stochastic trends and economic fluctuations. Am Econ Rev 81: 819–840

    Google Scholar 

  • Laidler DEW (1980) The demand for money in the US yet again. In: Brunner K, Meltzer A (eds) On the state of macroeconomics. Carnegie–Rochester Conference Series on Public Policy, p 12

  • Lown C, Peristiani S, Robinson KJ (1999) What was behind the M2 breakdown? Federal Reserve Bank of Dallas Financial Industry Studies Working Paper No. 02/1999

  • Mankiw NG (1991) The reincarnation of Keynesian economics, NBER Working Paper No. 3885

  • Mark NC, Sul D (2003) Cointegration vector estimation by panel DOLS and long-run money demand. Oxf Bull Econ Stat 65: 655–680

    Article  Google Scholar 

  • Mehra YP (1997) A review of the recent behaviour of M2 demand. Fed Res Bank Richmond Econ Q 83: 27–43

    Google Scholar 

  • Pedroni P (1999) Critical values for cointegration tests in heterogenous panels with multiple regressors. Oxf Bull Econ Stat Special Issue 653–670

  • Pedroni P (2000) Fully modified OLS for heterogenous cointegrated panels. Adv Econ 15: 93–130

    Article  Google Scholar 

  • Phillips PCB, Hansen BE (1990) Statistical inference in instrumental variable regression with I(1) processes. Rev Econ Stud 57: 99–125

    Article  Google Scholar 

  • Pradhan BK, Subramanian A (2003) On the stability of demand for money in a developing economy: some empirical issues. J Dev Econ 72: 335–351

    Article  Google Scholar 

  • Ramajo J (2001) Time-varying parameter error correction models: the demand for money in Venezuela, 1983:1-1994:IV. Appl Econ 33: 771–782

    Article  Google Scholar 

  • Siddiki JU (2000) Demand for money in Bangladesh: a cointegration analysis. Appl Econ 32: 1977–1984

    Article  Google Scholar 

  • Weliwita A, Ekanayake EM (1998) Demand for money in Sri Lanka during the post-1977 period: a cointegration and error correction analysis. Appl Econ 30: 1219–1229

    Article  Google Scholar 

  • Westerlund J (2006) Testing for panel cointegration with multiple structural breaks. Oxf Bull Econ Stat 68: 101–132

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood, VIC, 3125, Australia

    Paresh Kumar Narayan

  2. School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology, Melbourne, Australia

    Seema Narayan

  3. Department of Economics, Faculty of Business and Economics, Monash University, Melbourne, Australia

    Vinod Mishra

Authors
  1. Paresh Kumar Narayan
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Seema Narayan
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Vinod Mishra
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Paresh Kumar Narayan.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Narayan, P.K., Narayan, S. & Mishra, V. Estimating money demand functions for South Asian countries. Empir Econ 36, 685–696 (2009). https://doi.org/10.1007/s00181-008-0219-9

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-008-0219-9

Keywords

JEL Classification

Search

Navigation