Uncertainty and Money Demand Function in Developing Countries

As monetary policy authorities influence many macroeconomic variables by determining monetary aggregates, their relationships with other macroeconomic variables are critical in setting the most appropriate monetary policy rules. Identifying the variables affecting money demand and having a stable money demand function is essential for monetary policy. This paper examines the stability of the money demand function for 12 developing countries over the sample 2006.Q1-2023.Q3. We employ the Autoregressive Distributed Lag Model and the Cross-Sectionally Autoregressive Distributed Lag Model because of the different degrees of integration of the selected variables. According to the results, there is a stable long-run relation in the money demand function for selected developing countries. The uncertainty variable, which is the study’s primary objective, affects money demand negatively in the long run; it does not temporarily affect the demand for money. The findings also indicate that the real GDP (inflation) positively (negatively) impacts demand for real monetary aggregates as expected. The real interest rate measuring the opportunity cost of holding money does not significantly affect money demand. Although the effect of the exchange rate is positive in the short run, it turns negative as time passes and in the long run. This finding supports the ‘wealth effect’ in developing countries.