Empirical analysis of money demand in South Africa (1980-2011): an autoregressive distributed lag approach.
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Date
2013
Authors
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Publisher
University of Zululand
Abstract
The estimation of money demand function and determination of its stability is common
practice in macroeconomic research due to its significance in the transmission mechanism of
monetary policy. This study investigates stability of the long-run money demand for both
narrow and broad money in South Africa over the period 1980 to 2011, using expenditure
components of Gross Domestic Product (GDP) as scale variables, the real effective
exchange rate, inflation and a representative short-term interest rate as opportunity cost
variables. The bounds testing procedure, a single equation cointegration technique, is
applied to test for cointegration between the endogenous and exogenous variables.
To achieve this objective, the Autoregressive Distributed Lag (ARDL) approach (Pesaran et
al., 2001) is employed to estimate the long-run equilibrium relationships between real money
balances and disaggregated expenditure components of Gross Domestic Product in addition
to the interest rate and inflation as variables reflecting the opportunity cost of holding money.
Both short-run and long-run relationships are explored to understand the dynamic
adjustments through the error correction mechanisms of the model. The CUSUM and
CUSUMQ tests (Brown et al., 1975) are applied to examine the possibility of structural
breaks in money demand functions, as well as parameter stability. Results indicate that M2
and M3 money aggregates are cointegrated and are maintaining a stable long-run
relationship with their determinants. However, M0 and M1 monetary aggregates are found
not co-integrated with their determinants. Different expenditure components have different
influence on the demand for broad money. This research also gives evidence that demand
for broad money has remained stable despite the external shocks experienced in the
previous years due to the global economic meltdown.
Description
Submitted to the Faculty of Commerce, Administration and Law in fulfilment of the requirements for the Master of Commerce (Economics) Degree at the University of Zululand, South Africa, 2013.
Keywords
Gross Domestic Product, Money demand -- South Africa