Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia

Ousama Ben-Salha and Zied Jaidi

The Journal of Economic Asymmetries, 2014, vol. 11, issue C, 30-45

Abstract: The current article aims to estimate the money demand function in Tunisia. Unlike many previous money demand studies, the major components of real income are considered. Based on annual data ranging between 1979 and 2011 and the ARDL bounds testing approach, results reveal evidence of cointegration between the broad money demand and its determinants, namely the final consumption expenditure, the expenditure on investment goods, the export expenditure and the interest rate. The error correction model shows that the demand for money is only affected by the interest rate and the expenditure on investment goods in the short-run, while in the long-run the final consumption expenditure and the interest rate represent the major money demand determinants. These findings are robust to a variety of alternative money demand specifications and estimation methods. The Saikkonen–Lütkepohl cointegration test with structural shift and the Johansen–Mosconi–Nielsen structural break cointegration test are performed in order to control for structural change. In addition, the stability of the relationship is checked using the Chow stability test and the Hansen parameter instability test. In the light of the study, we advance that monetary policy in Tunisia should be based on a broad definition of money. Furthermore, the estimation of money demand functions must take into account the different expenditure components of real income.

Keywords: Broad money demand; Expenditure components; ARDL modeling; Structural change; Tunisia (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (10)

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Working Paper: Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:11:y:2014:i:c:p:30-45

DOI: 10.1016/j.jeca.2014.06.001

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