Determination of Long and Short Run Demand for Money in the West African Monetary Zone (WAMZ) Countries: A Panel Analysis
This paper examines demand for real money balances in six West African countries from 1985–2014 using a panel cointegration technique. Real income and inflation rate positively affect demand for money, whereas interest rate spread, real effective exchange rate, and the U.S. real interest rate negatively affect broad money demand in the long run. Income elasticity is greater than unity in the long term and less than unity in the short term. All the variables examined are significant except effective exchange rate. Both the currency substitution and capital mobility hypotheses hold for the long run, but only the capital mobility hypothesis holds in the short run. We recommend that monetary aggregate grow more slowly than economic growth to maintain price stability. Countries should maintain a stable exchange rate and ensure a market driven interest rate policy.
Agenor, P.-R. and Khan, M. S. (1996). Foreign currency deposits and the demand for money in developing countries. Journal of Development Economics, 50(1):101–118.
Arize, A. C., Malindretos, J., and Shwiff, S. S. (1999). Structural breaks, cointegration, and speed of adjustment Evidence from 12 LDCs money demand. International Review of Economics and Finance, 8(4):399–420.
Arrau, P., Gregorio, J. D., Reinhart, C. M., and Wickham, P. (1995). The demand for money in developing countries: Assessing the role of financial innovation. Journal of Development Economics, 46(2):317–340.
Bahmani, S. (2008). Stability of the Demand for Money in the Middle East. Emerging Markets Finance and Trade, 44(1):62–83.
Bahmani-Oskooee, M. (2009). How stable is the demand for money in African countries? Journal of Economic Studies, 36(3):216–235.
Bahmani-Oskooee, P. M. and Rhee, H.-J. (1994). Long-Run Elasticities of the Demand for Money in Korea: Evidence from Cointegration Analysis. International Economic Journal, 8(2):83–93.
Bitrus, Y. P. (2011). The demand for money in Nigeria. European Journal of Business and Management, 3(6):63–85.
Dekle, M. R. and Pradhan, M. (1997). Financial liberalization and money demand in ASEAN countries: implications for monetary policy. Working Paper 97/36, International Monetary Fund.
Engle, R. F. and Granger, C. W. J. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2):251–276.
Hamori, S. et al. (2008). Empirical analysis of the money demand function in Sub-Saharan Africa. Economics Bulletin, 15(4):1–15.
Herve, D. B. G. and Shen, Y. (2011). The Demand for Money in Cote d’Ivoire: Evidence from the Cointegration Test. International Journal of Economics and Finance, 3(1):188.
Hoffman, D. L. and Rasche, R. H. (2001). Aggregate money demand functions: Empirical applications in cointegrated systems. Boston: Kluwer Academic Publishers.
Im, K. S., Pesaran, M., and Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1):53–74.
Jenkins, C. (1999). Money demand and stabilisation in Zimbabwe. Journal of African Economies, 8(3):386–421.
Kararach, G. (2002). Evidence on the demand for money function in Uganda. Technical Report WP No. 2002-01, Zimbabwe, Policy Analyst-UNICEF and others, EconWPA.
Kovanen, A., Dagher, J., et al. (2011). On the Stability of Money Demand in Ghana; A Bounds Testing Approach. Working Paper WP/11/273, International Monetary Fund.
Kumar, S., Webber, D. J., and Fargher, S. (2013). Money demand stability: A case study of Nigeria. Journal of Policy Modeling, 35(6):978–991.
Laidler, D. (1991). The Quantity Theory Is Always and Everywhere Controversial–Why? The Economic Record, 67(199):289–306.
Laidler, D. (1993). The demand for money: theories, evidence and problems. Forth Edition, Harper Collins College Publishers, page 56.
Levin, A., Lin, C.-F., and James Chu, C.-S. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1):1–24.
Mishkin, F. S. (1999). International Experiences with Different Monetary Policy Regimes. Working Paper 6965, National Bureau of Economic Research.
Nachega, J.-C. (2001). A Cointegration Analysis of Broad Money Demand in Cameroon. IMF Working Papers 01/26, International Monetary Fund.
Nell, K. S. (1999). The Stability of Money Demand in South Africa, 1965-1997. Studies in Economics Discussion Papers 9905, School of Economics, University of Kent.
Niyimbanira, F. (2013). Stability Of Money Demand In A Developing Economy: Empirical Evidence From South Africa. The International Business and Economics Research Journal, 12(5):565.
Ogunsakin, S. and Awe, A. (2014). Impact of financial liberalization on the stability of Nigerian money demand function. International Journal of Economics, Business and Finance, 2(1):1–18.
Pedroni, P. (1999). Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors. Oxford Bulletin of Economics and Statistics, 61(S1):653–670.
Pedroni, P. (2004). Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis. Econometric Theory, 20(03):597–625.
Rother, P. (1999). Money demand in the West African economic and monetary union - the problems of aggregation. Journal of African Economies, 8(3):422–447.
Salisu, A., Ademuyiwa, I., and Fatai, B. (2013). Modelling the Demand for Money in Sub-Saharan Africa (SSA). Economics Bulletin, 33(1):635–647.
Suliman, Z. S. and Dafaalla, H. A. (2011). An econometric analysis of money demand function in Sudan, 1960 to 2010. Journal of Economics and International Finance, 3(16):793–800.
Tahir, J. (1995). Recent Developments in Demand for Money Issues: Survey of Theory and Evidence with Reference to Arab Countries. Working Papers 9530, Economic Research Forum.
Tano, G. G. (2011). Money Demand Estimation using SASQR. Paper SA01-2011, Southern Illinois University Carbondale.
Valadkhani, A. (2008). Long- and Short-Run Determinants of the Demand for Money in the Asian-Pacific Countries: An Empirical Panel Investigation. Annals of Economics and Finance, 9(1):77–90.
Valadkhani, A. and Alauddin, M. (2003). Demand for M2 in Developing Countries: An Empirical Panel Investigation. School of Economics and Finance Discussion Papers and Working Papers Series 158, School of Economics and Finance, Queensland University of Technology.
Copyright (c) 2017 by the Author(s)
This work is licensed under a Creative Commons Attribution 4.0 International License.