Money demand and financial liberalization in Mexico: A cointegration approach

Javier L. Arnaut

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the long run dynamics of Mexico’s money demand using Johansen’s cointegration approach with different specifications. The empirical evidence indicates that real balances, real income and the interest rate are cointegrated in all subperiods. The findings suggest that recent changes in economic policy through financial liberalization affected money demand functions; this due to the fact that income elasticity fell down during the transition through the subperiods, but simultaneously this did not affect the functional stability. The cointegrated coefficient on currency-money ratio (M0/M1) suggests that when the ratio falls, the demand for money falls too. Nevertheless, this last evidence is statistically weak. In addition, it was determined that alternative equations are not better than the conventional ones.

Keywords: Money demand; financial liberalization; cointegration; error correction mechanism; currency-money ratio; Mexico (search for similar items in EconPapers)
JEL-codes: C32 E50 G28 E41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2008
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