Vol 1, No 1 (2013)
Empirical Evidence on Money Demand Modelling
Goran Petrevski
Abstract
The paper provides an empirical analysis of the demand for narrow money in Macedonia. Specifically, it deals with the following issues: the empirical modelling of the demand for money in the long-run, the short-run dynamics of money, and the stability of the demand for money. The empirical analysis of the demand for money covers the period Q1:1994-Q4:2008. The period following the Global economic crisis is excluded due to clear structural break in data. For the purpose of the research, the following variables are applied: narrow money as represented by the monetary aggregate M1, real Gross Domestic Product, and nominal interest rate on 3-month time deposits, denominated in domestic currency. The Vector Error Correction Model (VECM) is employed by running two alternative test statistics: the trace of the stochastic matrix and the maximum eigenvalue. Based on both tests it may be concluded that there is cointegration relationship between the variables of interest. Furthermore, the research results may reflect the fact that we model the demand for narrow money, which serves for transaction purposes and not as an asset, so that economic agents tend to economise with money holdings. This finding is further confirmed by the pretty high coefficient before the interest rate, which is in line with the interest semi-elasticity usually found in other countries with less developed financial systems. As for the short-run dynamics, the results suggest very slow adjustment of the demand for money towards its long-run equilibrium level. Finally, an estimation of the recursive coefficients before real income and nominal interest rates is conducted and found that they remain quite stable over time. Therefore, one may take this exercise as evidence in favour of the stability of the demand for money.
Full text: 
PDF
Keywords
Money demand; Vector error correction model; Cointegration
Publication information
Volume 1, Issue 1
Year of Publication: 2013
ISSN: 1857 - 8721
Publisher: EDNOTERA
How to cite
Petrevski, G.: Empirical Evidence on Money Demand Modelling. Journal of Applied Economics and Business, Vol 1, No. 1, 23-31. (2013)