Stability of the Money Demand Function Revisited: Evidence from Sierra Leone

Saidu Swaray

doi:doi:10.11648/j.ijefm.20221003.15

| Peer-Reviewed

Stability of the Money Demand Function Revisited: Evidence from Sierra Leone

Saidu Swaray

Published in International Journal of Economics, Finance and Management Sciences (Volume 10, Issue 3)

Received: 19 May 2022 Accepted: 6 June 2022 Published: 14 June 2022

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 10, Issue 3)
DOI	10.11648/j.ijefm.20221003.15
Page(s)	122-133
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Money Demand, Monetary Policy, Narrow Money, Broad Money, ARDL, CUSUM, CUSUMSQ

References

[1]	Bahmani-Oskooee, M. & Shabsigh, G. (1996). The Demand for Money in Japan: Evidence from Cointegration Analysis. Japan and the World Economy, ELSEVIER, 8, 1-10.
[2]	Bahmani-Oskooee, M. & Wang, Y. (2007). How Stable is the Demand for Money in China? Journal of Economic Development, 32 (1), 21-30.
[3]	Bahmani-Oskooee, M. & Gelan, A. (2009). How Stable is the Demand for Money in African Countries? Journal of Economies Studies, 36 (3), 216-235.
[4]	Boucekkine, R., Laksaci, M. & Touati-Tliba, M. (2021). Long-run Stability of Money Demand and Monetary Policy: The Case of Algeria. Halshs-03120699. (Aval.: https://halshs.archieves-ouvertes.fr/halshs-03120699).
[5]	Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society, 37, 149-192.
[6]	Caprio, G. & Honohan, P. (1991). Monetary Policy Instruments for Developing Countries: A World Bank Symposium. The International Bank for Reconstruction Development, 1818 H Street, N. W., Washington D.C. 20433, U.S.A.
[7]	Dagher, J. & Kovanen, A. (2011). On the Stability of Money Demand in Ghana: A Bounds Testing Approach. IMF Working Paper, WP/11/273.
[8]	Drama, B. G. & Yao, S. (2010). The Demand for Money in Cote d’Ivoire: Evidence from the Cointegration Test. School of International Business and Management, Shanghai University Working Paper, WP No. 20131. (Aval. https://mpra.ub.uni-muenchen.de).
[9]	Friedman, M. (1970). A Theoretical Framework for Monetary Analysis. Journal of Political Economy, 78 (2), 193-238.
[10]	Fisher, I. (1911). The purchasing power of money, New York: Macmillan.
[11]	Kallon, K. M. (1992). Analysis of Money Demand in Ghana. The Journal of Developing Areas, 26 (4), 475-488.
[12]	Kallon, K. M. (2009). The Demand for Money in Sierra Leone Revisited. Journal of African Development, African Finance and Economic Association, 11 (1), 41-59.
[13]	Keynes, J. M. (2006). The General Theory of Employment, Interest and Money. New York: Atlantic Publishers and Distributors, First Published in 1936.
[14]	Kiptui, M. C. (2014). Some Empirical Evidence on the Stability of Money Demand in Kenya. International Journal of Economics and Financial Issues, 4 (4), 849-858.
[15]	Kumar, S., Webber, D. J. & Fargher, S. (2013). Money Demand Stability: A Case of Nigeria. Journal of Policy Modeling, Elsevier, 1-16.
[16]	Mansaray, M. & Swaray, S. (2013). Financial Liberalization, Monetary Policy and Money Demand in Sierra Leone. Journal of Monetary and Economic Integration, 63-87.
[17]	Narayan, P. K. (2004). Reformulating critical values for the bounds F-statistics approach to cointegration: an application to the tourism demand model for Fiji. (Dep. of Econ. Discussion Paper 04/04). Department of Economics. Monash University, Victoria 3800, Australia. Retrieved February 2011, from http://arrow.monash.edu.au
[18]	Nchor, d. & Adamec, V. (2016). Investigating the Stability of Money Demand in Ghana. Procedia-Social and Behaviour Sciences, Elsevier, 220, 288-293. (Available on: www.sciencedirect.com).
[19]	Niyimbanira, F. (2013). Stability of Money Demand in a Developing Economy: Empirical Evidence from South Africa. International Business and Economics Research Journal, 12 (5), 565-572.
[20]	Owoye, O. & Onafowora, O. A. (2007). M2 Targeting, Money Demand, and Real GDP Growth in Nigeria: Do Rules Apply? Journal of Business and Public Affairs, 1 (2), 1-20.
[21]	Perron, P. (1989). The Great Crash, the Oil Price Shock and the Unit Root Hypothesis. Econometrica, 57, 1361-1401.
[22]	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.
[23]	Romer, D. (1996). Inflation and Monetary Policy (Chap. 9): Advanced Macroeconomics. McGraw-Hill, ISBN 0-07-053667-8, 388-433.
[24]	Vogelsang, T. & Perron, T. (1998). Additional Test for a Unit Root allowing for a Break in Trend Function at an unknown Time. International Economic Review, 39 (4), 1073-1100.
[25]	Zgambo, P. & Chileshe, P. (2014, November). Empirical Analysis of the Effectiveness of Monetary Policy in Zambia. 19^th Meeting of COMESA Committee of Central Bank Governors, Lilongwe, COMESA Monetary Institute Working Paper.
[26]	Zivot, E. & Andrews, D. W. K. (1992). Further Evidence on the Great Crash, the Oil Price Shock and the Unit Root Hypothesis. Journal of Business and Economic Statistics, 10, 251-270.

Cite This Article

Plain Text BibTeX RIS

APA Style

Saidu Swaray. (2022). Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. International Journal of Economics, Finance and Management Sciences, 10(3), 122-133. https://doi.org/10.11648/j.ijefm.20221003.15

Copy | Download

ACS Style

Saidu Swaray. Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. Int. J. Econ. Finance Manag. Sci. 2022, 10(3), 122-133. doi: 10.11648/j.ijefm.20221003.15

Copy | Download

AMA Style

Saidu Swaray. Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. Int J Econ Finance Manag Sci. 2022;10(3):122-133. doi: 10.11648/j.ijefm.20221003.15

Copy | Download

@article{10.11648/j.ijefm.20221003.15,
  author = {Saidu Swaray},
  title = {Stability of the Money Demand Function Revisited: Evidence from Sierra Leone},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {10},
  number = {3},
  pages = {122-133},
  doi = {10.11648/j.ijefm.20221003.15},
  url = {https://doi.org/10.11648/j.ijefm.20221003.15},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20221003.15},
  abstract = {The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.},
 year = {2022}
}

Copy | Download

TY  - JOUR
T1  - Stability of the Money Demand Function Revisited: Evidence from Sierra Leone
AU  - Saidu Swaray
Y1  - 2022/06/14
PY  - 2022
N1  - https://doi.org/10.11648/j.ijefm.20221003.15
DO  - 10.11648/j.ijefm.20221003.15
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 122
EP  - 133
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20221003.15
AB  - The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.
VL  - 10
IS  - 3
ER  -

Copy | Download

Author Information

Saidu Swaray

Research & Statistics Department, Bank of Sierra Leone, Freetown, Sierra Leone

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Saidu Swaray. (2022). Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. International Journal of Economics, Finance and Management Sciences, 10(3), 122-133. https://doi.org/10.11648/j.ijefm.20221003.15

Copy | Download

ACS Style

Saidu Swaray. Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. Int. J. Econ. Finance Manag. Sci. 2022, 10(3), 122-133. doi: 10.11648/j.ijefm.20221003.15

Copy | Download

AMA Style

Saidu Swaray. Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. Int J Econ Finance Manag Sci. 2022;10(3):122-133. doi: 10.11648/j.ijefm.20221003.15

Copy | Download

@article{10.11648/j.ijefm.20221003.15,
  author = {Saidu Swaray},
  title = {Stability of the Money Demand Function Revisited: Evidence from Sierra Leone},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {10},
  number = {3},
  pages = {122-133},
  doi = {10.11648/j.ijefm.20221003.15},
  url = {https://doi.org/10.11648/j.ijefm.20221003.15},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20221003.15},
  abstract = {The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.},
 year = {2022}
}

Copy | Download

TY  - JOUR
T1  - Stability of the Money Demand Function Revisited: Evidence from Sierra Leone
AU  - Saidu Swaray
Y1  - 2022/06/14
PY  - 2022
N1  - https://doi.org/10.11648/j.ijefm.20221003.15
DO  - 10.11648/j.ijefm.20221003.15
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 122
EP  - 133
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20221003.15
AB  - The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.
VL  - 10
IS  - 3
ER  -

Copy | Download