Monetary uncertainty and the demand for money in Ghana

Bernard Njindan Iyke and Sin-Yu Ho

Journal of Developing Areas, 2017, vol. 51, issue 4, 1-15

Abstract: Monetary uncertainty may cause the demand for money to increase or the velocity of money to fall. This is the so-called Friedman’s hypothesis. This hypothesis has received mixed empirical support in the literature, thereby necessitating further examination. An important issue in the literature is that the existing studies have mainly focused on developed economies when testing Friedman’s hypothesis. The few studies focusing on developing countries have mainly tested the stability of the demand for money function. However, how monetary uncertainty determines the behaviour of the demand for money function is equally important. In this paper, we tested Friedman’s hypothesis by focusing on a developing country, thereby adding to the existing literature. Using a technique which allows us to differentiate short-run impact from long-run impact, we examined the impact of monetary uncertainty on the money demand in Ghana during the period 1990Q1 to 2016Q3. In addition, we assessed the stability of the demand for money function in this country. We found that monetary uncertainty has a negative and significant impact on the demand for money in both the short and the long run. This finding refutes Friedman’s hypothesis. The implication of this finding is that the public prefers to hold safer assets to cash money during periods of monetary uncertainty in Ghana. Finally, we found evidence in support of a stable demand for money function in Ghana. One implication of the stable demand for money function in the country is that monetary policy aimed at smoothing the growth rates of monetary aggregates could enhance the stability of the economy by ruling out monetary policy as a source of uncertainty. The other is that, because a stable demand for money function implies the demand for money changes in a predictable fashion, the central bank may be able to achieve the objectives of the inflation-targeting framework that it is currently practising.

Keywords: Monetary Uncertainty; Demand for Money; Ghana (search for similar items in EconPapers)
JEL-codes: C30 E41 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.51:year:2017:issue4:pp:1-13

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