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Determination of Long and Short Run Demand for Money in the West African Monetary Zone (WAMZ) Countries: A Panel Analysis

Agya Adi () and Joshua Sunday Riti
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Joshua Sunday Riti: University of Jos, Nigeria

Econometric Research in Finance, 2017, vol. 2, issue 2, 79-97

Abstract: This paper examines demand for real money balances in six West African countries from 1985--2014 using a panel cointegration technique. Real income and inflation rate positively affect demand for money, whereas interest rate spread, real effective exchange rate, and the U.S. real interest rate negatively affect broad money demand in the long run. Income elasticity is greater than unity in the long term and less than unity in the short term. All the variables examined are significant except effective exchange rate. Both the currency substitution and capital mobility hypotheses hold for the long run, but only the capital mobility hypothesis holds in the short run. We recommend that monetary aggregate grow more slowly than economic growth to maintain price stability. Countries should maintain a stable exchange rate and ensure a market driven interest rate policy.

Keywords: demand for money; interest rate spread; capital mobility; currency substitution; panel analysis (search for similar items in EconPapers)
JEL-codes: E41 E52 C33 O11 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.33119/ERFIN.2017.2.2.2

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