INVESTIGATING THE HUNGARIAN MONEY DEMAND FUNCTION: POSSIBLE IMPLICATIONS FOR MONETARY POLICY

Year 2020, , 71 - 87, 30.06.2020

Heinrich Nel Derick Blaauw Anmar Pretorius

https://doi.org/10.34109/ijefs.202012105

Cited By: 3

Abstract

Historically, research focusing on the money demand function developing economies (especially Eastern European transition economies) was a difficult undertaking because of under-developed financial systems and the unavailability of data. This study aims to assist in filling this gap in the literature by employing three different estimation techniques to estimate the M1 and M2 money demand functions for Hungary. The study uses quarterly data for an 18-year period, obtained from the IMF’s International Financial Statistics database. The results based on the bounds testing procedure as well as the other two approaches confirm that a stable, long-run relationship exists between the demand for money and its determinants. The results’ robustness is enhanced by the similarities between the results of the various approaches used in the study. The money demand function can therefore theoretically serve as a tool to measure the effect of monetary policy decisions and in determining what parameters of the money demand function to adjust in order to yield the required effects. It is suggested that, in the case of Hungary the M1 money demand function might be the most appropriate model on which monetary policy decisions should be based.

Keywords

Money demand, Hungary, stability, ARDL, cointegration

References

• Achsani, N.A. (2010). Stability of money demand in an emerging market economy: An error correction and ARDL model for Indonesia. Research Journal of International Studies, 13, 54-62.
• Andronescu, A., Mohammadi, H. & Payne, J.E. (2004). Long-run estimates of money demand in Romania. Applied Economics Letters, 11(14), 861-864.
• Arango, S. & Ishaq Nadiri, M. (1981). Demand for money in open economies. Journal of Monetary Economics, 7(1), 69-83.
• Bahmani-Oskooee, M. & Ng, R.W. (2002). Long-run demand for money in Hong Kong: An application of the ARDL model. International Journal of Business and Economics, 1(2), 147-155.
• Buch, C.M. (2001). Money demand in Hungary and Poland. Applied Economics, 33(8), 989-999.
• Calza, A. & Zaghini, A. (2010). Sectoral money demand and the great disinflation in the United States. Journal of Money, Credit and Banking, 42(8), 1663-1678.
• Cziráky, D. & Gillman, M. (2006). Money demand in an EU accession country: A VECM study of Croatia. Bulletin of Economic Research, 58(2), 105-127.
• Dagher, J. & Kovanen, A. (2011). On the stability of money demand in Ghana: A bounds testing approach. New York: International Monetary Fund (IMF).
• Dritsakis, N. (2011). Demand for money in Hungary: An ARDL approach. Review of Economics and Finance, 1(5), 1-16.
• Duasa, J. (2007). Determinants of Malaysian trade balance: An ARDL bound testing approach. Global Economic Review, 36(1), 89-102.
• Fisher, I. (1911). The Purchasing Power of Money: Its Determination and Relation to Credit Interest and Crises. New York: Macmillan.
• Friedman, M. (1956). The Quantity Theory of Money – A Restatement. In M. Friedman (Ed.) Studies in the Quantity Theory of Money. Chicago: University of Chicago Press.
• Johansen, S. (1992). Testing weak exogeneity and the order of cointegration in UK money demand data. Journal of Policy Modelling, 14(3), 313-334.
• Johansen, S. & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration – with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210.
• Korap, H.L. (2011). Multirank cointegration analysis of Turkish M1 money demand (1987Q1-2006Q3). Ekonometri ve Istatistik e-dergisi, (6), 1-28.
• Narayan, P.K. (2005). The saving and investment nexus for China: Evidence from cointegration tests. Applied Economics, 37(17), 1979-1990.
• Payne, J.E. (2000). Post stabilisation estimates of money demand in Croatia: The role of the exchange rate and currency substitution. Ekonomski Pregled, 51, 1352-1368.
• Pesaran, M.H., Shin, Y. & Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
• Sun, Z., Sun, B. & Lin, S.X. (2013). The impact of monetary liquidity on Chinese aluminium prices. Resources Policy, 38(4), 512-522.
• Wesso, G.R. (2002). Broad money demand and financial liberalisation in South Africa. South African Reserve Bank Occasional Paper 18. Pretoria: South African Reserve Bank.