Economic policy uncertainty and the UK demand for money: evidence from the inter-war period

Taufiq Choudhry

Journal of Economic Studies, 2023, vol. 50, issue 7, 1485-1500

Abstract: Purpose - This paper empirically investigates the effect of economic policy uncertainty (EPU) on the UK money demand stability during the inter-war period (1920–1938). Both a narrow definition (M0) and a broad definition (M3) of money are investigated. Design/methodology/approach - The empirical investigation is conducted by employing the autoregressive distributed lag (ARDL) bounds testing approach to cointegration. Findings - Results presented indicate a stable demand for both definitions of money only when EPU is included as one of the determinants of demand function. The EPU imposes a negative effect on the demand for both definitions of money. The causality test results further indicate long- and short-term causality from the determinants (including EPU) to both forms of money demand. Practical implications - Significant presence of the economic uncertainty weakens the effects of the monetary policy on the economy. Originality/value - This is a historical economics paper. Given the turmoil and uncertainty associated with the inter-war period, an empirical investigation of UK money demand is an interesting exercise. This is the first such paper.

Keywords: Uncertainty; Money demand; Inter-war ear; Cointegration; Causality; E41; N14 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-03-2022-0167

DOI: 10.1108/JES-03-2022-0167

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