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Money Demand in Korea: A Cointegration Analysis, 1973-2014

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  • Hyungsun Chloe Cho
  • Miguel D. Ramirez

Abstract

This paper estimates the demand for real money in Korea over the 1973Q3 to 2014Q4 period via unit root and cointegration methods. Utilizing the Johansen cointegration methodology and the Pantula principle, it establishes that a long-term relationship exists among the included variables. The paper also estimates an error correction model (ECM) as well as a vector error correction model (VECM), extending previous analyses by performing forecasts and testing for Granger causality among the variables. It finds that the broader definition of money, M2, serves as a relatively better measure of the money aggregate than M1 when evaluating the stability of the real demand for money. The long-term interest (LR) rate also seems to provide better results than the short-term rate (SR), which is consistent with economic theory given that it refers to a long-run equilibrium relationship. Both the ECM and VECM estimates showed the expected (and significant) signs on the coefficients; LM2 (LM1) and LGDP were positively related and LM2 (LM1) and LR (SR) were negatively related. Granger block causality tests and impulse response functions together seem to suggest that the traditional money demand function which places as its ¡®dependent¡¯ variable, while including income and interest rates as its regressors, was a robust and stable model in the case of Korea.

Suggested Citation

  • Hyungsun Chloe Cho & Miguel D. Ramirez, 2016. "Money Demand in Korea: A Cointegration Analysis, 1973-2014," Business and Economic Research, Macrothink Institute, vol. 6(1), pages 96-110, June.
    • Handle: RePEc:mth:ber888:v:6:y:2016:i:1:p:96-110
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    References listed on IDEAS

    as
    1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    2. Pantula, Sastry G., 1989. "Testing for Unit Roots in Time Series Data," Econometric Theory, Cambridge University Press, vol. 5(2), pages 256-271, August.
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    Cited by:

    1. Osabuohien-Irabor Osarumwense & Julian I. Mbegbu, 2017. "Power and Size analysis of Co-integration tests in Conditional Heteroskedascity: A Monte Carlo Simulation," Romanian Statistical Review, Romanian Statistical Review, vol. 65(3), pages 17-34, September.
    2. Ufuk CAN & Zeynep Gizem CAN & Süleyman DEĞİRMEN, 2019. "Paranın Dolaşım Hızının ve Para Talebi Fonksiyonunun Ekonometrik Analizi: Türkiye Örneği," Istanbul Business Research, Istanbul University Business School, vol. 48(2), pages 218-247, November.

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    More about this item

    Keywords

    Granger Causality test; Error correction model; Johansen contegration test; Korea; Money demand function; Phillips-Perron unit root test; Vector error correction model (VECM); Zivot Andrews single-break unit root test. JEL C22; E41; &O5;
    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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