Instability of Money Demand: Recent Evidence for Thailand

Komain Jiranyakul, Timothy P. Opiela

Kellstadt Graduate School of Business and Department of Economics, DePaul University, Chicago, IL, USA.
School of Development Economics, National Institute of Development Administration, Bangapi, Bangkok, Thailand.

DOI: 10.4236/me.2014.58083                

Abstract

This study examines the short-run and long-run stability properties of money demand in Thailand using the monetary aggregates M1, M2 and M3, for the period from 1993Q1 to 2012Q4. We use the dynamic OLS specification of Stock and Watson (1993) and Ball (2001), and the estimation technique of the Johansen cointegration test to determine the stability of money demand. The results from the Johansen cointegration test reveal that there is only a long-run relationship between M1 money demand and real GDP (a proxy for real income) and interest rate. In the short run, only a change in real GDP affects M1 money holdings. In the long-run both real GDP and an interest rate determine money demand. The short-run instability of M1 money demand makes it difficult for the monetary authorities to use M1 as an intermediate target to control intermediate-run and long-run inflation.

Keywords

Real Money Demand, Real Income, Interest Rate, Cointegration

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	Ericsson, N.R. (1998) Empirical Modeling of Money Demand. Empirical Economics, 23, 295-315. http://dx.doi.org/10.1007/BF01294409
[2]	Goldfeld, S.M. (1973) The Demand for Money Revisited. Brookings Papers on Economic Activity, No. 3, 577-646. http://dx.doi.org/10.2307/2534203
[3]	Goldfeld, S.M. (1976) The Case of Missing Money. Brookings Papers on Economic Activity, No. 3, 683-730. http://dx.doi.org/10.2307/2534372
[4]	Barnett, W.A., Fisher, D. and Serletis, A. (1992) Consumer Theory and the Demand for Money. Journal of Economic Literature, 30, 2086-2119.
[5]	Arize, A.C. (1989) An Econometric Investigation of Money Demand Behavior in Four Asian Developing Economies. International Economic Journal, 3, 79-93.
[6]	Bahmani-Oskooee, M. and Rhree, H.J. (1994) Long-Run Elasticities of the Demand for Money in Korea: Evidence from Cointegration Analysis. International Economic Journal, 8, 83-93.
[7]	Inoue, T. and Hamori, S. (2008) An Empirical Analysis of the Money Demand Function in India. IDE Discussion Papers No. 166, Institute of Developing Economies, Chiba City.
[8]	Stock, J.H. and Watson, M.W. (1993) A Simple Estimator of Cointegrating Vectors in Higher Order Integrated System. Economometrica, 61, 783-820. http://dx.doi.org/10.2307/2951763
[9]	Ball, L. (2001) Another Look at Long-Run Money Demand. Journal of Monetary Economics, 47, 31-44. http://dx.doi.org/10.1016/S0304-3932(00)00043-X
[10]	Lutkepohl, H., Terasvirta, T. and Wolters, J. (1999) Investigating Stability and Linearity of a German M1 Money Demand Function. Journal of Applied Econometrics, 14, 511-525. http://dx.doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<511::AID-JAE529>3.0.CO;2-C
[11]	Golinelli, R. and Patorello, S. (2002) Modelling the Demand for M3 in the Euro Area. European Journal of Finance, 8, 371-401. http://dx.doi.org/10.1080/13518470210160911
[12]	Setzer, R. and Wolff, G.B. (2013) Money Demand in the Euro Area: New Insights from Disaggreate Data. International Economics and Economic Policy, 10, 297-315. http://dx.doi.org/10.1007/s10368-012-0214-7
[13]	Jawadi, F. and Sousa, R. (2013) Money Demand in the Euro area, the US and the UK: Assessing the role of Nonlinearity. Economic Modeling, 32, 507-515.
[14]	Johansen, S. and Juselius, K. (1990) Maximum Likelihood Estimation and Inference on Cointegration—With Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 169-210. http://dx.doi.org/10.1111/j.1468-0084.1990.mp52002003.x
[15]	MacKinnon, J.G., Haug, A.A. and Michelis, L. (1999) Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration. Journal of Applied Econometrics, 14, 563-577. http://dx.doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R
[16]	Phillips, P.C.B. and Perron, P. (1988) Testing for a Unit Root in Time Series Regression. Biometrika, 75, 335-346. http://dx.doi.org/10.1093/biomet/75.2.335