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

Author

Listed:
  • Nepal, Rabindra

    (University of Wollongong, Australia)

  • Paija, Nirash

    (Tribhuvan University, Nepal)

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.

Suggested Citation

  • Nepal, Rabindra & Paija, Nirash, 2020. "Stability of Money Demand Function in the SAARC Region: A Panel Co-Integration Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 35(1), pages 111-128.
    • Handle: RePEc:ris:integr:0792
    DOI: 10.11130/jei.2020.35.1.111
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    References listed on IDEAS

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    Cited by:

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    2. Bhatta, Guna Raj & Nepal, Rabindra & Harvie, Charles & Jayanthakumaran, Kankesu, 2022. "Testing for the uncovered interest parity condition in a small open economy: A state space modelling approach," Journal of Asian Economics, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    Money Demand; Panel ARDL; Granger Causality; Interest Rate.;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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