LONG‐RUN M3 DEMAND IN SOUTH AFRICA: A COINTEGRATED VAR MODEL

K. R. Todani

10 citations0/0 files storedSouth African Journal of Economics

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

Abstract

Abstract This paper presents a system cointegration analysis of a long‐run demand for money (measured in terms of M3) in South Africa. In particular, the paper estimates a cointegrated vector autoregression model, consisting of real money, income and the opportunity cost of holding money. Using a variety of theory consistent identification schemes, the money demand function is identified along with other two cointegrating relations, namely, an IS‐type relationship and a relationship relating inflation to the spread between long‐ and short‐term interest rates. The model shows that of the variables used, only income and real money are error‐correcting to the money demand relation. The money demand relation is found to be relatively stable over the sample period, when short‐run fluctuations are corrected for. The model further shows that the long‐run link between money and inflation is rather weak.

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References

1991Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models 1995Likelihood-Based Inference in Cointegrated Vector Autoregressive Models 1999Monetary Theory and Policy 2006The Cointegrated VAR Model: Methodology and Applications 1992Cointegration in partial systems and the efficiency of single-equation analysis 2000Cointegration analysis in the presence of structural breaks in the deterministic trend 1994Identification of the long-run and the short-run structure an application to the ISLM model 1999Some tests for parameter constancy in cointegrated VAR‐models

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2011On the Stability of Money Demand in Ghana

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