Is Money Demand Function Stable In Developing Economies? Evidence From Panel Data Study

Abstract

This study evaluates money demand in a sample of developing countries by analysing data from 1990-2023. This study employs a dynamic Panel ARDL model and a suite of stability and causality tests to explore the key issues surrounding the money demand function. The findings provide substantial empirical support for a statistically significant and enduring association within the specified function of demand for money. Moreover, the results indicate that the estimated values of all variables, except for the real interest rate, are both rational and consistent with the economic theory. Nevertheless, the inclusion of the real interest rate as a proxy variable for opportunity cost in a given sample of developing economies has been criticised as inadequate because of its failure to accurately capture prevailing financial market conditions. The application of the Dumitrescu and Hurlin (2012) test verifies the notion that money demand is influenced by income, interest rate, and inflation rate, in line with the theoretical framework of monetary transmission mechanisms.