countries. Using new electronic technologies caused more than ever the expansion of e-commerce. Obviously, this high-speed and low-cost method of business needs the monetary instruments and proportionate payments. In other words, transfer of funds by paper-based method is considered as a major obstacle to the trade. For this reason, electronic transfer of funds has been developed along with the development of e-commerce in various forms. Security, convenience, speed, low cost and high efficiency are considered to be the most important characteristics of electronic payment method (Crede, 1996) . These methods of transfer, which can be made by automatic teller machines (ATMs) and electronic funds of transfer at the point-of-sale (POS) devices, include electronic money (e-money), electronic cards (e-cards) and electronic check. Widespread publishen of electronic money has considerable business, economic, political and social impacts. Economically, most important effects of expanding the use of electronic money will be manifest on the money supply, moneydemand, monetary policy and central bank; and then will target the necessary capital, job and goods to create new economy with the development of money markets. Replacement of electronic money, whether in terms of the influence on money supply and of the influence on the demand for money, is especially important because firstly, fluctuations in money market will cause fluctuations in other macro markets; and secondly, influence of monetary policy will be questioned, considering the moneydemand reduction under circumstances similar to Keyness liquidity trap . Unlike money published by the central bank, electronic money is internal money . In other words, electronic money is like demand deposit owed by the holder from money publisher (Pifareti, 1998) . So, it is obvious that while reducing the central bank's income from budget of publishing banknotes (Humphrey, 2003) , publishing electronic money increases the money supply . In addition to the above, considering that the electronic money is able be replaced instead of banknote and coin, it will be possible to gradually replace electronic money instead of the central bank's money .
The evidence presented in this paper suggests that traditional linear specifications of the demand for money may be mis-specified for economies in which currency substitution is an important phenomenon. We have shown that for one such country, Vietnam, the data for the 1990s suggest a characterization of the dollarization process in which currency-substitution effects alter the economy’s transactions technology and hence the (traditionally specified) long-run income elasticity of the demand for money whereas more traditional portfolio or hedging considerations are relevant only in the short-run. Our specification implies a variable long-run income elasticity of demand. In industrialized countries monetary targeting has tended to be abandoned for interest rate policies, but in developing countries the relative thinness of financial markets does not allow monetary authorities to rely only on interest rate and a monetary aggregate is often required as an intermediate target of monetary policy. In such circumstances, the failure to estimate correctly the currency substitution effect will lead to systematic mis-prediction of the demand for money in circumstances where there is a tendency for the nominal exchange rate to move over time (e.g. in high inflation contexts).
Dynamic simulations provide a much more (?excessively) rigorous test of the model. Examination of chart 3 shows that the demand for money was significantly under predicted for the period 1969 to 1986. Outside this period however, the actual behaviour of lrm1 was well tracked. These conclusions are reinforced by examination of the statistics contained in Table 5. In every case, as would be expected, the diagnostic statistics for the dynamic simulations are inferior to both the ex-post static simulations and the naïve forecasts. Furthermore the hypothesis that the mean error is zero is rejected at the 5% level of significance. This is no doubt to the under prediction which occurred in the period 1969 to 1986.
Estimation of moneydemand function gathered considerable interest because of its implication to policymakers and researches when planning monetary policy. The prime objective of this paper was to examine the moneydemand function in Iran while emphasizing the influence of exchange rate crisis on it. In this regards, we believe that in country where there is a black market for foreign currencies, it is the black market exchange rate and not the official rate that should enter into the moneydemand equation. This paper has used GMM technique to estimate the demand for money (M2) in Iran for the entire sample period of 1990Q2 to 2013Q1. The Generalized Method of Moments (GMM) approach is employed as the main estimation technique to test the presence of relations among variables which are assumed to be the determinants of moneydemand in Iran. According to empirical literature and the main emphasis of paper, we involve real GDP, inflation rate, lagged real M2 and market Exchange rate in addition to instrumental variables. This paper extends the proposition of including exchange rate as an additional determinant to moneydemand function.
The US demand for money function and its stability have been analyzed by many studies. Some often cited works are Goldfeld (1976), Judd and Scadding (1982), Lucas (1988), Poole (1988), Baba et al. (1992), McNown and Wallace (1992), Stock and Watson (1993), Hoffman et al. (1995) and Yossifov (1998), Ball (2001) and Choi and Jung (2009). 1 Duca and VanHoose (2004) have surveyed important developments in monetary economics including the need to study the demand for money and the current view that this relationship is unimportant because many central banks have abandoned targeting monetary aggregates and switched to the rate of interest as the monetary policy instrument. However, according to Duca and VanHoose, studying this relationship is not an irrelevant activity and therefore summarized the salient features of some key empirical works. Others who take a similar view on the need to study the demand for money are Leeper and Roush (2003 ) and Ireland (2004). Ireland has estimated a business cycle model for the USA within the ISLM model framework augmented with a Phillips curve and with the post 1980 quarterly data. However, he found that money played relatively a smaller role in explaining the dynamics of inflation and output. In our view this does not mean that demand for money is redundant because Ireland’s results are also consistent with instability in the demand for money which might have contributed to the poor correlation between money, inflation and output . 2 The dependent variable in the demand for money varied from the narrow definition of money (M1) to broader measure with weighted averages of monetary aggregates. Although some influential studies have found that the US demand for money (mainly M1) is stable for a long period up to the early or mid 1970s, others have found that it has become unstable since then due to financial reforms, improvements in payments technology and cash management practices,
Estimation of demand for money performs a key role due to its importance in determining the effects of monetary policy in regulating the economic system. In a developing country such as Jamaica, this issue comes up to be even more important because it should provide the government with instruments able to guarantee stability and growth in the long run.
However, Bahmani-Oskooee and Bohl (2000) who estimated the demand for money for the unified Germany showed that cointegration among a set of variables does not necessarily imply a stable function. One must apply statistical tests for the stability of long-run as well as short-run estimated elasticities to determine whether they are stable over time. Following this argument, Bahmani-Oskooee and Shin (2002) reconsidered the Korean demand for money one more time. They estimated a moneydemand function using all three monetary aggregates one by one, i.e., M1, M2, and M3 measures. Although they were cointegrated with their determinants, the application of CUSUM and CUSUMSQ tests to the residuals of each error-correction model revealed that regardless of which measure of monetary aggregate was used the Korean moneydemand is unstable.
A limited number of previous studies on the demand for money in Fiji are Luckett (1987), Joyson (1997), Jayaraman and Ward (2000), Katafono (2001), Rao and Singh (2005a) and more recently Singh and Kumar (2006a and 2006b). The merits and weaknesses of these earlier studies were discussed in Rao and Singh (2005a). While Katafono found that the demand for money is unstable, Rao and Singh, Jayaraman and Ward and Singh and Kumar found that the demand for money in Fiji is well determined and temporally stable. In all these previous studies an important issue that was not addressed is that the cointegration relationship may have a structural break during the sample period. Rao and Singh only briefly discuss this issue. Therefore, we explore the stability of the demand for money with the Gregory-Hansen techniques. Since Rao and Singh have obtained similar coefficients for their cointegrating equations with two alternative techniques namely the LSE-Hendry GETS and the Johansen maximum likelihood systems methods, we shall use their specification which is:
The plots of actual and predicted values of the change in the logarithm of real money indicate fairly good fit. A regression between the actual and fitted values showed that the intercept is zero and the slope is unity. The preferred equation JML(2) was tested for temporal stability and neither the CUSUM nor CUSUM SQUARES test showed any instability. Here we obtained similar result as GETS that demand for money is stable in Tonga. The plot of the stability test CUSUM SQUARES is given in figure 2 below 9 .
This paper focuses on the demand for money in Iran and utilizes the demand systems approach in the context of locally Flexible Functional Forms – the Generalized Leontief (GL). It also pays explicit attention to the theoretical regularity conditions of positivity, monotonicity and curvature. Without satisfaction of all these theoretical regularity conditions, the resulting inferences are worthless.
Most of the theoretical derivations of the demand for money in the literature have been carried out in a static partial-equilibrium framework, in which eco- nomic agents choose the level of cash holdings that will minimize transactions costs. There are weaknesses to this framework. First, it assumes that the future rate of return of the financial assets is known with certainty. Second, economic agents do not undertake investment and consumption decisions simultaneously. Third, it is very difficult to understand the factors that make the traditional de- mand functions unstable. Fourth, the model is inadequate to analyze the impact of economic uncertainty on the demand for money. Fifth, the traditional models are static and do not allow for intertemporal substitution of financial assets. Sixth, empirical extensions assume that the parameters of the demand-for- money functions are constant and do not change over time.
The implications of financial reforms at different stages of development of an economy, on trend behavior of velocity of money can be interpreted through the views of Bordo and Jonung (1987). They opined that technical progress in the financial sector has two competing influences on the trend behavior of velocity, each dominating at a particular stage of development. During the first stage, the economy is characterized by increasing monetization. Cash and demand deposits are increasingly used for settling transactions, replacing earlier reliance on barter trade. As a result, demand for transaction balances grows more rapidly than income, and velocity is characterized by a negative trend. During the second stage, financial liberalization allows the introduction of a range of tradable and highly liquid securities. These assets substitute money as a store of value. Additionally, the technological innovation in the financial sector and the rapid transfer of funds facilitates the economizing of money balances. As a result money balances grow slower compared to the volume of transactions and velocity stabilizes or even increase over time. Hence velocity follows a U-shaped pattern. Such pattern makes difficult for modeling the demand for money function.
In Pakistan, like other countries, considerable effort has been made in estimating moneydemand functions. For example, Akhtar (1974), Abe, et al. (1975), Mangla (1979), Khan (1980, 1982, 1982a), Nisar and Aslam (1983), Ahmed and Khan (1990), Hossain (1994), Khan and Ali (1997), Qayyum (1998, 2001), etc., have estimated moneydemand functions by using alternative specifications. Some of these studies such as Ahmed and Khan (1990) and Qayyum (2001) have also examined the stability of their estimated moneydemand functions. Generally, the M2 function is found to be stable. However, with the exception of Hossain (1994), Khan and Ali (1997), and Qayyum (1998, 2001), these studies have ignored the time series properties of the relevant variables and therefore may be prone to spurious regression. Furthermore, according to our knowledge these studies did not rigoursly
The demand for money decision basically emerged from the individual choice behavior, thus there was a need to analyze the factors, which played significant role in the determination of an individual’s cash balance decision. The current study tried to bridge this gap in Pakistani literature. Rest of the study is organized as: next comes the comparison of Simple sum and Divisia aggregates in the literature, after that the formulation of Divisia aggregates was discussed, followed by Analysis of Moneydemand function based on these aggregates. In this analysis, first time series properties of the data were tested and then one by one all three aggregates were used for moneydemand analysis. At the end the results of overall analysis were summarized and some insights were gathered.
Studies of the demand for money in African countries have presented results of applications of time series techniques that were based typically on small sample sizes, which may significantly distort the power of standard tests and lead to misguided conclusions. To the knowledge of the authors, there is no current study that tests for structural changes in the moneydemand relationships for any African economy. Recognizing the limitations of previous studies, the purpose of this paper is to contribute to the empirical literature on the stability of moneydemand by investigating and estimating moneydemand relationships using more up-to-date econometric techniques that allow for structural breaks in the cointegrating relationship for Nigeria. In addition to estimating the canonical specification, alternative specifications are estimated which include additional variables to proxy for the cost of holding money.
The basic element in conducting monetary policy is demand for money. It makes possible for monetary authorities to effect expected changes in besieged macroeconomic variables such as interest rate and income by correct changes in monetary aggregates. The demand function is an imperative mean to meet the liquidity needs of economic agent (Handa, 2009). Because of its significance, the moneydemand has been the object of attention by researchers. Initially, research was limited to only developed modern countries but now work on developing countries gained great momentum since mid 1980’s. The vector error correction model (VECM) and other estimation techniques gave greater momentum to the work on moneydemand. The Autoregressive distributed lag modeling (ARDL) approach has given unique results to work on demand for money. In this study we use ARDL approach to investigate the long run relationship between moneydemand and other macroeconomics variables used in this study. This approach will investigate the co-integrating property of demand for money in Pakistan using the method of vector error correction model (VECM). We use M2 monetary aggregate to measure moneydemand as dependent variable. The independent variables include per capita GDP, real interest rate, exchange rate, fiscal deficit and rural and urban population. Another issue in the determination of moneydemand function is its stability which has been investigated by many other researchers. Due to difference in estimation techniques, the results had been mixed and researchers could not come to the same conclusion. The other reason of dissimilar results is different data time spans. Fisher (1911) initially presented the Quantity theory of moneydemand which is also known as transaction demand for money. In his theory, the income was the only determinant of moneydemand and interest rate was ignored. The general form of moneydemand function is stated as:
This approach to the theoretical analysis of monetary policy, with no explicit reference to money, arguably overlooks investigations on the role of moneydemand by ﬁrms. Em- pirically, in industrialized countries ﬁrms hold a considerable share of money supply. For instance, Mulligan (1997) documents that U.S. non- ﬁ nancial ﬁ rms held at least 50% more demand deposit than households in the 1970-1990 period. In addition, ﬁ rms’ demand for money as a share of the aggregate appears to be increasing over time. For instance, Bover and Watson (2005) document that the U.S. ﬁ rms’ share of M1 was 35% of the non- ﬁ nancial private sector in the mid-1980s and 62% in 2000. In view of these remarkable stylized facts, the present paper attempts to evaluate the role of ﬁ rms’ moneydemand in the monetary policy transmission mechanism within an optimizing general equilibrium framework of the New Keynesian type.
Ghana from 1990 to 2014. The study estimated the results using two set of variables for real demand for money: M1 and M2+. The results showed that, GDP affects the level of demand for money in the long run while the interest rate affects it in the short run. The results obtained from this study were in line with conclusions by Amoako‑Adu (1991) on the Ghanaian economy, Kogar (1995) and Mutluer and Barlas (2002). The error correction term in each of the cases shows that, 18 % of deviation in the real demand for money is corrected annually. The test of parameter stability using the CUSUM test showed that, the moneydemand function was stable over the period. The Chow test was also employed to test whether structural breaks occurred over the period covered by the study. This was necessary due to the fact that, the study was investigating stability of the moneydemand function over a sampled period. The results showed that, there were no structural breaks over the period covered. This study thus recommends that the Bank of Ghana should continue to implement policies that enhance macroeconomic stability and economic growth. Moneydemand matters for the design of a stabilizing monetary policy in the case where the outstanding stock of money effectively restricts households’ consumption decisions. Price level will then not be neutral with regard to real activity and the inflation rate. In other words, the classical mechanism fails and purely nominal changes have real effects. In this case, moderate changes or adjustment in interest rates by the Bank of Ghana should be made depending on the state of the economy. This is because interest rate changes do not only affect households’ savings and consumption expenditures but also due to changes in cash holdings due to rise in cost under high interest rates.
When the augmented moneydemand specification is used, the elasticity with respect to inflation introduced as a positive function of the real interest rate becomes significantly negative. But compared to industrialized countries estimates its absolute value is rather small. This result can be found in other studies of moneydemand in China 10 . This difference can be explained by the fact that state owned enterprises hold a significant share of sight deposits. Because of their soft budget constraints, they react less to inflation than enterprises subject to market rules. Another explanation can be found in the cash in advance hypothesis: a surge of inflation pushes agents to increase their money holdings. They substitute cash for sight deposits to buy consumer durables. In the short run, an increase of inflation does not modify the volume of money but its composition in favor of cash 11 . Global stability of the estimated coefficients can not be rejected now for the 1988 shock as the Chow's test shows. In other words, to let the coefficients vary endogenizes the change of behavior of money holders. However this is not true for 1994, where a structural break is suspected. Two suggestions are made to explain a shift of the moneydemand in 1994. First, the larger statistical cover means that money holders not included before are now taken into account through other financial institutions 12 . In China the banking sector is quite segmented. State enterprises mainly go to state banks. Deposits holders in other financial institutions are more likely to obey to the rules of the market 13 . Their demand for money should therefore reacts more to inflation than state enterprises with soft budget constraints. The second hypothesis is inferred from the end-of-period value of the transactions-elasticity, close to unity. The monetization process could be ending. In this last case, the augmented moneydemand could be too restrictive for the recent years, and then could induce the global estimates instability.