Some Empirical Evidence on the Demand for Money in the Pacific Island Countries

Kumar, Saten and Singh, Rup (2009): Some Empirical Evidence on the Demand for Money in the Pacific Island Countries. Forthcoming in: Studies in Economics and Finance : pp. 1-14.

Abstract

This paper explores the stability of the demand for narrow money in the Pacific Island Countries viz, Fiji, Vanuatu, Samoa, Solomons and Papua New Guinea (PNG). The results from the time series approaches of LSE-Hendry’s General to Specific (GETS) and Johansen’s Maximum Likelihood (JML) suggest that real income, nominal rate of interest and real narrow money, are cointegrated. The CUSUM and CUSUMSQ stability test results indicate that the demand for money functions for these countries are stable and therefore the respective monetary authorities may consider targeting money supply in their conduct of monetary policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cointegration, Demand for Money, General to Specific Method and Johansen Maximum Likelihood Method
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

References

Bahmani-Oskooee, M. and Rehman, H. (2005) “Stability of the Money Demand Function in Asian Developing Countries," Applied Economics, Vol. 37, pp. 773-792.

International Financial Statistics, December, 2003. IMF CD-ROM (Washington DC: International Monetary Fund).

Jayaraman, T.K. and Ward, B.D. (2003) “Impact of Financial Sector Reforms and Stability of Money Demand Functions in Samoa,” in Jayaraman, T.K., Issues in Monetary Economics of the South Pacific Island Countries, Suva: The University of the South Pacific.

Kannapiran, C. (2001) “Stability of Money Demand and Monetary Policy in Papua New Guinea: An Error Correction Model Analysis,” International Economic Journal, Vol.15, pp. 73-84.

Katafono, R. (2001)“Demand for Money in Fiji,” Staff Working paper (03/2001). Suva: The Reserve Bank of Fiji.

Kumar, S. (2009) “A Re-examination of Private Consumption in Fiji,” Pacific Economic Bulletin, Vol. 24, pp.70-81.

Kumar, S. (2008) “Income and Price Elasticities of Exports in Philippines,” The ICFAI Journal of Applied Economics, Vol. VII, pp.40-46.

Kumar, S. (2007) “The Stability of Demand for Money in Bangladesh: Time Series Methods,” The ICFAI Journal of Monetary Economics, Vol. V, pp. 27-35.

Kumar, S. and Manoka, B. (2008) “Testing the Stability of Demand for Money in Tonga,” The Empirical Economics Letters, Vol.7, pp.835-843.

Pesaran, M. and Pesaran, B. (1997) Working with Microfit 4.0. Oxford: Oxford University Press.

Poole, W. (1970) “The Optimal Choice of Monetary Policy Instruments in a Simple Macro model,” Quarterly Journal of Economics, Vol.7, pp.192-216.

Rao, B.B. (2007) “Cointegration for the Applied Economist,” 2nd Edition, Hampshire: Macmillan Publishers Limited.

Rao, B.B. (2006) “Estimating Short and Long run Relationships: A Guide to Applied Economists,” forthcoming in Applied Economics.

Rao, B.B and Kumar, S. (2009) “A Panel Data Approach to the Demand for Money and the Effects of Financial Reforms in the Asian Countries,” forthcoming in the Economic Modelling.

Rao, B.B and Kumar, S. (2008) “Cointegration, Structural Breaks and the Demand for Money in Bangladesh,” Applied Economics, Vol. 24, pp. 1-20.

Rao, B.B and Kumar, S. (2007) “Structural Breaks, Demand for Money and Monetary Policy in Fiji,” Pacific Economic Bulletin, Vol.22, pp.54-62.

Rao, B. and Singh, R. (2005a) “Cointegration and Error Correction Approach to the Demand for Money in Fiji,” Pacific Economic Bulletin, Vol.2, pp.72-86.

Rao, B. and Singh, R. (2005b) “Demand for Money in Fiji with PcGets”, Applied Economics Letters, forthcoming.

Singh, R. and Kumar, S. (2009) “Application of the Alternative Techniques to Estimate Demand for Money in Developing Countries,” forthcoming in the Journal of Developing Areas.

Sriram, S. S., (1999) “Survey of Literature on Demand for Money: The Cointegration and Demand for Money in PICs Theoretical and Empirical Work with Special Reference to Error-Correction Models,” IMF Working Paper 7WP/99/64 (Washington DC: International Monetary Fund).

The Asian Development Bank, (2005) “Economic and Financial Update - 2005,” Key Indicators of Developing Asia and Pacific Countries. Manilla: The Asian Development Bank.