MONEY DEMAND FUNCTION IN THE SOUTH AFRICAN ECONOMY: EVIDENCE FROM ARDL AND STRUCTURAL BREAKS ANALYSIS

Abstract

Stability of money demand remains an important issue in monetary policy effectiveness. This is because a stable money demand function is an important monetary policy tool in achieving monetary objectives and stability. This paper investigated structural breaks in money demand and its determinants in the South African economy. The study made use of quarterly data obtained from the South African Reserve Bank, from 2003 to 2017, using the Bai-Perron Multiple Breakpoint Tests in conjunction with an ARDL model. The empirical results indicated that the money demand function in South Africa has not undergone regime shifts during the study period. This was further confirmed by means the CUSUM Test. The findings also ascertained that money demand is cointegrated with the interest rate, inflation rate, GDP, the exchange rate and credit to the private sector as a measure of financial development. The results proved that the interest rate and inflation rate have negative and significant effects on the money demand function in the long-run, while GDP is found to have a positive and significant impact. It is concluded that the money demand function in South Africa could be effectively employed in predicting and forecasting monetary policy outcomes.

Keywords

• Money demand,South Africa,structural breaks

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