Stability of Money Demand Function in the SAARC Region: A Panel Co-Integration Approach

Nepal, Rabindra; Paija, Nirash

doi:2020.35.1.111

The Journal of Economic Integration 2020 March;35(1) :111-128.
DOI: https://doi.org/10.11130/jei.2020.35.1.111

Stability of Money Demand Function in the SAARC Region: A Panel Co-Integration Approach

Rabindra Nepal, ¹ Nirash Paija, ²

¹University of Wollongong, Australia
²Tribhuvan University, Nepal

Corresponding Author: Rabindra Nepal ,Tel: 0242214720, Email: rnepal@uow.edu.au

ABSTRACT

This study explores the causality relationships between money demand, real income, price, and interest rate by focusing on South Asia for the period between 1986 and 2017 using panel data econometrics. Our estimations based on panel auto-regressive distributed lag (ARDL) reveal a significant and positive long-run relationship between real income and money demand, while a negative relationship exists with interest rate and price. The panel vector error correction model causality results highlight a feedback relationship between money demand and real income, but a short-run unidirectional causality between price and interest rate and real income. We also discover long-run bidirectional causality among these variables. Our results indicate that the money demand function was stable in South Asian economies during the time period considered by this study. Therefore, the central bank of these countries can use money supply as an appropriate instrument to manage monetary policy to achieve overall price and macroeconomic stability.

JEL Classification

E41: Demand for Money
E51: Money Supply; Credit; Money Multipliers
E52: Monetary Policy
E42: Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems

Keywords: Money Demand | Panel ARDL | Granger Causality | Interest Rate.