Money demand function for Southeast Asian countries

Tuck Cheong Tang

129 citations0/0 files storedJournal of Economic Studies

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Purpose The purpose of this paper is to empirically investigate the money demand function for five Southeast Asian countries, viz. Malaysia, Thailand, Singapore, the Philippines, and Indonesia. Design/methodology/approach The ARDL modeling approach is employed because of its ability to incorporate both I(0) and I(1) regressors. Findings The results reveal that real M2 aggregate, real expenditure components, exchange rate, and inflation rate are cointegrated for Malaysia, the Philippines, and Singapore. The statistical significance of real income components suggests the bias of using single real income variable in money demand (M2 aggregate) specification of both short‐ and long‐run. The CUSUM and CUSUMSQ tests show that the estimated parameters are stable for the five Southeast Asian economies, except for Indonesia which is based on short‐run specification. Practical implications These findings are important for policy makers in formulating monetary policy. Originality/value Besides conventional determinants of money demand such as exchange rate and interest rate variables, this study considers the major components of final expenditure (GDP) – final consumption expenditures (private and government sectors), expenditures on investment goods, and exports as scale variables.

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References

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