Asymmetric effects of economic policy uncertainty on demand for money in developed countries

Salah Nusair, Dennis Olson and Jamal Al-Khasawneh

The Journal of Economic Asymmetries, 2024, vol. 29, issue C

Abstract: This paper examines the asymmetric effects of economic policy uncertainty (EPU) on the demand for money in Canada, Japan, the United Kingdom, and the United States. We use linear and nonlinear ARDL models with monthly data over the period 1985–2022 to conduct the analysis. Results from the linear ARDL model show that changes in EPU have no short-run or long-run effect on money demand in any country, except in the US, where changes in EPU have a positive short-run effect. However, with the nonlinear ARDL model, we find evidence of short-run and long-run effects across all four countries. Both increases and decreases in EPU have negative long-run effects on Canadian and UK money demand, but a positive effect on US money demand. For Japan, rising EPU has a positive effect on money demand, whereas falling EPU is insignificant. The long-run results are consistent in each country over time. The recent COVID-19 period had a short-run impact across countries and a long-run effect on the relationship between EPU and money demand in Canada and the UK. In contrast, the Brexit period had no differential long-run impact on money demand across countries, and a short run impact was only observed in the UK. Our results highlight the importance of adopting nonlinear ARDL models instead of linear models to analyze money demand and the need to examine countries separately since the long-run effects of EPU on money demand vary across countries.

Keywords: Uncertainty; Money demand; Asymmetry; Nonlinear ARDL model (search for similar items in EconPapers)
JEL-codes: C22 D80 E41 E50 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:29:y:2024:i:c:s1703494923000622

DOI: 10.1016/j.jeca.2023.e00350

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