From Boom to Bust: Unravelling the Cyclical Nature of Fiji’s Money Demand

Nikeel Nishkar Kumar, Kulsoom Bibi and Rajesh Mohnot ()
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Nikeel Nishkar Kumar: School of Economics, Finance, and Marketing, RMIT University, Melbourne 3000, Australia
Kulsoom Bibi: School of Economics, Finance, and Marketing, RMIT University, Melbourne 3000, Australia
Rajesh Mohnot: College of Business Administration, Ajman University, Ajman P.O. Box 346, United Arab Emirates

JRFM, 2025, vol. 18, issue 7, 1-17

Abstract: This study investigates cyclical asymmetries in money demand models considering the moderating effect of financial development. Prior research has overlooked this issue in the money demand literature within the Fijian context, where research is outdated. Using annual data from 1983 to 2023, we find that income elasticity is about positive unity, irrespective of recessions or expansions. In expansions, an increase in interest rates reduces money demand. An increase in interest rates reduces money demand nine times more strongly in recessions. These effects are accentuated with financial development. Declining interest rates do not impact money demand. The findings suggest that stable money demand could be achievable, but only once the impact of structural breaks is accounted for. Under ideal conditions—without such breaks—money demand exhibits stability, and its connection to income and interest rates appears predictable. However, in reality, structural disruptions complicate this relationship, making money demand less consistent with its key drivers and undermining the reliability of money supply as a monetary policy instrument. The findings align with the pulling on a string hypothesis that monetary contractions control inflation, but expansions may not impact output.

Keywords: money demand; asymmetric effects; interest rates; financial development; pulling on a string (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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