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The Impacts of Interest Rate and Exchange Rate Volatilities on the Demand for Money in Developing Economies

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  • Felix S. Nyumuah

Abstract

Volatilities in the interest rate and the exchange rate cause instability in money demand functions. This study investigates the effect of interest and exchange rates volatilities on money demand in developing countries using time series data of four African countries namely, Equatorial Guinea, Gambia, Nigeria and Uganda. The model used is a conventional log linear money demand function, with money demand specified as a function of income, interest rate, inflation rate, exchange rate, interest rate volatility and exchange rate volatility. The results show that on the whole the interest rate and exchange rate volatilities do not have significant effects on money demand in developing countries. However, the money demand functions of these economies prove unstable. These findings imply that the monetary authorities should resort to inflation targeting monetary policy and employ the interest rate as the policy instrument.

Suggested Citation

  • Felix S. Nyumuah, 2018. "The Impacts of Interest Rate and Exchange Rate Volatilities on the Demand for Money in Developing Economies," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(3), pages 56-69, March.
    • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:3:p:56-69
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    References listed on IDEAS

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    1. Miles, Marc A, 1978. "Currency Substitution, Flexible Exchange Rates, and Monetary Independence," American Economic Review, American Economic Association, vol. 68(3), pages 428-436, June.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    4. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
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    Cited by:

    1. Tomader Elhassan, 2021. "Asymmetric Impact of Exchange Rate Fluctuations on Money Demand in Sudan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(5), pages 406-417, May.
    2. Mohammed Saiful Islam & Mohammad T. Uddin, 2020. "Interest Rate Interactions between Bangladesh and the US: Possible Pass Through From the US," International Business Research, Canadian Center of Science and Education, vol. 13(7), pages 1-1, July.

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    More about this item

    Keywords

    demand for money; money demand stability; interest rate volatility; exchange rate volatility; monetary policy;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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