Bhatta, Siddha Raj (2011): Stability of demand for money function in Nepal: A cointegration and error correction modeling approach.
Download (907kB) | Preview
This paper examines the long run and short run demand for money functions and their stability issues for Nepal using the annual data set of 1975-2009 by using the recently developed ARDL modeling to cointegration popularized by Pesaran and Shin (1999). The bounds test shows that there exists the long run cointgrating relationship among demand for real money balances, real GDP and interest rate in case of both narrow and broad monetary aggregates. Further, the CUSUM and CUSUMSQ test reveal that both the long run narrow and broad money demand functions are stable. The results show that demand for real money balance in Nepal is a stable and predictable function of a few variables and the central bank can rely on the monetary aggregates as intermediate targets for achieving the broad economic objectives.
|Item Type:||MPRA Paper|
|Original Title:||Stability of demand for money function in Nepal: A cointegration and error correction modeling approach|
|English Title:||Stability of Demand for Money Function in Nepal: A Cointegration and Error Correction Modeling Approach|
|Keywords:||money demand function; cointegration; error correction modeling|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money
|Depositing User:||Siddha Bhatta|
|Date Deposited:||18. Sep 2012 13:38|
|Last Modified:||13. Feb 2013 09:31|
Achsani, N.A. (2010). “Stability of Money Demand in an Emerging Market Economy: An Error Correction and ARDL Model for Indonesia,” Research Journal of International Studies, 13, March, 2010.
Aghevli, B.B., M.S. Khan, P.R. Narvekar, and B.K. Short (1979). “Monetary Policy in Selected Asian Countries”. IMF Staff Papers, 26: 775–824.
Ahmed, S. and Md. Ezazul Islam (2007). “A Cointegrating Analysis of the Demand for Money in Bangladesh,” Working Paper Series, Research Division, Bangladesh Bank.
Akinlo, A.E. (2006). “The Stability of Money Demand in Nigeria: An Autoregressive Distributed Lag Approach,” Journal of Policy Modeling, 28: 445-452.
Arango, S. and M.I. Nadiri (1981). “Demand for Money in Open Economies,” Journal of Monetary Economics, 7 (January 1981): 69-83.
Bahmani-Oskooee, M. (2001). “How Stable is M2 Money Demand Function in Japan?” Japan and the World Economy, 13: 455-461.
Bahmani-Oskooee, M. and H. Rehman (2005). “Stability of Money Demand Function in Asian Developing Countries”, Applied Economics, 37: 773-792.
Bahmani-Oskooee, M. and Sahar Bahmani (2007). “Exchange Rate Volatility and Demand for Money in Iran?,” An Unpublished Paper, Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, Wisconsin 53201
Bahmani-Oskooee, M. and Raymond Chi Wing Ng (2002). “Long run Demand for money in Hongkong: An Application of the ARDL Model” International Journal of Business and Economics, 1(2): 147-155.
Bahmani-Oskooee, M. and Yongqing Wang (2007). “How Stable is the Demand for Money in China?” Journal of Economic Development, 32(1) (Jan 2007)
Banerjee, A., J. Dolado, J.W. Galbraith and D.F. Hendry (1993). Co-integration, Error Correction and the Econometric Analysis of Non-stationary Data, Oxford: Oxford University Press.
Bhattacharya, B. B. (1974). “Demand and Supply of Money in a Developing Economy: A Structural Analysis for India,” The Review of Economics and Statistics, 56(4) (Nov. 1974): 502-510.
Boughton, J. M. (1981). “Recent Instability of the Demand for Money: An International Perspective”, Southern Economic Journal, 47(Jan.1981): 579-597.
Brown, R., J. Durbin, and J. Evans (1975). “Techniques for Testing the Constancy of Regression Relations Over Time,” Journal of the Royal Statistical Society, Series B, 37: 149–63.
Brunner K. and A.H. Meltzer (1964). “Some Further Evidence on the Supply and Demand Functions for Money,” Journal of Finance, 19, May, 1964.
Budha Birendra (2011). “An Empirical analysis of Money Demand Function in Nepal.” Economic Review, NRB, Kathmandu, Nepal.
Butter, F.A.G. Den, and M.M.G. Fase (1981). “The Demand for Money in EEC Countries,” Journal of Monetary Economics, 8 (Sept. 1981): 201-230.
Cameron N. (1979). “The Stability of Canadian Demand for Money Function 1954-75,” The Canadian Journal of Economics, vol. 12, no. 2 (May, 1979), pp. 258-281.
Chow, G.C. (1966). “On the Long Run and Short Run Demand for Money,” Journal of Political Economy, April: 111-131.
Engle, Robert F. and C. W. J. Granger. (1987). "Cointegration and Error Correction Representation, Estimation, and Testing," Econometrica, 55 (March 1987): 251-76.
Gaudel, Y.S. (2003). Monetary System of Nepal. New Delhi: Adroit Publishers.
Goldfeld, S.M. (1973). “The Demand for Money Revisited,” Brookings Papers on Economic Activity, 3: 577-646.
Granger, C.W.J. (1981). "Some Properties of Time Series Data and Their Use in Econometric Model Specification,” Journal of Econometrics, 16: 121-130.
Gujarati, D. (1978). “The Demand for Money in India,” Journal of Development Studies 5(1): 59-64
Gupta, K.L. (1970). “The demand for Money in India: Further Evidence,” Journal of Development studies, 6 (January 1970): 159-168.
Halicioglu, F. and Mehmet Ugur (2005). “On Stability of Money Demand for a Devoloping OECD Country,” Global Business and Economic Review, 7(8).
Hamburger, M.J. (1966). “The Demand for Money by Households, Money Substitutes, and Monetary Policy,” Journal of Political Economy, 74 (December 1996):600-623.
Hamori, N. and S. Hamori (1999). “Stability of Money Demand Function in Germany,” Applied Economics Letters, 6: 329-332.
Heller, H.R. (1965). “The Demand for Money: The Evidence from the Short Run Data,” Quarterly Journal of Economics, 79 (June 1965): 291-303.
Jacobs, R.L. (1974). “Estimating the Long-Run Demand for Money from Time Series Data,” Journal of political Economy, 82(6), Nov.-Dec., pp. 1221-1238.
Johansen, S. (1988). “Statistical Analysis of Cointegration Vectors,” Journal of Economic Dynamics and Control, 12(2/3): 231-254.
Johansen, S. and Juselius, K. (1990). “Maximum Likelihood Estimation and Inference on Cointegration: With Applications to the Demand for Money,” Oxford Bulletin of Economics and Statistics, 52(2):169-210.
Johnson, H.J. (1963). “Notes on the Theory of Transaction Demand for Cash,” Indian Journal of Economics. 44(172) (July 1963):1-11.
Khan, M.A. and Md Abdul Wadud, (2003). “Monetary Mechanism in Bangladesh: A Cointegration and Error Correction Modeling Appraoch,” A Paper presented at the 2nd European Integration and Banking Efficiency Workshop held on October 30-31, 2003 at Lisbon, Portugal.
Khan, M.S. (1974). “The Stability of the Demand for Money Functions in the United States, 1901-1965,” Journal of Political Economy, 82(6) (Nov.-Dec. 1974): 1205-1220
Khatiwada, Y.R. (1997). “Estimating the Money Demand in Nepal: Some Empirical Issues,” Economic Review, Occasional Papers, NRB No.9.
Kharel R.M. and Tap Prasad Koirala (2010). “Modelling Demand for Money in Nepal”NRB Working Paper
Laidler, D.E.W. (1966), “Some Evidence on the Demand for Money,” Journal of Political Economy 74(1) (Feb. 1966): 55-61.
Laidler, D.E.W. (1971), “The Influence of Money on Economic Activity: A Survey of Some Current Problems,” in G. Clayton’s et al (eds.), Monetary Theory and Monetary Policy in the 1970s (Proceedings of the 1970 Shetfield Money Seminar ), Oxford University Press.
Laurenceson, J. and J.C.H. Chai (2003). “Financial Reform and Economic Development in China”, Cheltenham
Lumas, G.S. and Y.P. Mehra (1976). “The Stability of the Demand for Money Function: The Evidence from Quarterly Data,” The Review of Economics and Statistics, 58(4) ( Nov. 1976): 463-468.
Mehra, Y.P. (1991). “An Error-Correction Model of U.S. M2 Demand,” Federal Reserve Bank of Richmond, Economic Review, 77(May/June): 3-12.
Meltzer, A.G. (1963). “Demand for Money: Evidence from the Time series,” Journal of Political Economy, 219-246. Narayan, P.K. and Russel Smyth (2004). “Temporal Causality and the Dynamics of Exports, Human Capital and Real Income in China,” International Journal of Applied Economics, 1: 24-35.
Omer, M. (2010). “Stability of Money Demand Function in Pakistan,” SPB Working Paper Series, 36(Aug).
Pandey, R.P. (1998) “An Application of Cointegration and Error Correction Modeling: Towards Demand for Money in Nepal,” Economic Review, Occasional Papers, NRB No.10, 1998.
Pesaran and B. Pesaran (1997). “Working with Microfit 4.0: Interactive Econometric Analysis”, Oxford University Press.
Pesaran and Y. Shin (1999). “An Autoregressive Distributed Lag Modeling Approach to Cointegration Analysis”, in S. Strom (ed.), Econometrics and Economic Theory in the 20th Century, The Ragnar Frisch Centennial Symposium, 1998,
Cambridge University press, Cambridge. Pesaran, M. H., Y. Shin, and R. J. Smith (1996). “Bounds Testing Approaches to the Analysis of Level Relationships,” DEA Working Paper 9622, Department of Applied Economics, University of Cambridge.
Pesaran, M. H., Y. Shin, and R. J. Smith (2001). “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics, 16: 289-326.
Poudyal, S.R. (1989). “The Demand for Money in Nepal,” Economic Review, Occasional Papers, NRB No.3.
Rutaysire, M. J. (2010). “Economic Liberalization, Monetary Policy and Demand for Money in Rwanda: 1980-2005,” AERC Research Paper 193, African Research Consortium, Nairobi, January 2010.
Sampath, R.K. and Zakir Hussain (1981). “Demand for Money in India,” The Indian Economic Journal, 29(1) (July-Sept. 1981): 17-36.
Samreth, S. (2008). “Estimating the Money Demand Function in Combodia: ARDL Approach,” MRPA Paper No.16274, posted on July 2009.
Simmons, R. (1992). “An Error-correction Approach to Demand for Money in Five African Developing Countries,” Journal of Economic Studies, 19: 29–47.
Sriram, S.S. (2000). “A Survey of Recent Empirical Money Demand Studies,” IMF Staff Paper, 47(3): 334-365.
Taylor, M.P. (1993). “Modeling the Demand for UK Broad Money,” The Review of Economics and Statistics, 75 (1) ( Feb 1993): 112-117.
Tseng, W. and R. Corker. (1991). Financial Liberalization, Money Demand, and Monetary Policy in Asian Countries. IMF Occasional Paper No. 84, International Monetary Fund, Washington, D.C.