Precautionary Demand for Money and Economic Uncertainty: Evidence from Panel Heterogeneous Cointegration Method
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Purpose: The purpose of this paper is to investigate both the long-run and short-run relationship between the demand for holding money from the precautionary perspective and economic uncertainty from government unknown or uncertain policies in 28 economies without ignoring the roles of the scale variable (income), the opportunity cost variable (the interest rate) and the external variable (the exchange rate) in the money demand function. Design/methodology/approach: For empirical procedures, this paper applies panel heterogeneous cointegration method to examine the presence of long-run cointegrating relationships. For robustness checks, another two proxies of economic uncertainty are applied. Findings: We demonstrate that there exists an obvious long run cointegrating relationships between real money demand and their determinants, namely, the real income, the nominal interest rate, the exchange rate and economic policy uncertainty. Research limitations/implications: The estimated results from the panel heterogeneous cointegration method demonstrate that economic uncertainty from uncertain government policy can act as an explanatory indicator about unknown future economic events, which could assist policy makers in fine-tuning the money demand function to provide the most desirable liquidity support for improved macroeconomic stability. Originality/value: This study applies the panel cointegration method in 28 representative economies for a n augmented money demand function.
Abstract
Purpose: The purpose of this paper is to investigate both the long-run and short-run relationship between the demand for holding money from the precautionary perspective and economic uncertainty from government unknown or uncertain policies in 28 economies without ignoring the roles of the scale variable (income), the opportunity cost variable (the interest rate) and the external variable (the exchange rate) in the money demand function. Design/methodology/approach: For empirical procedures, this paper applies panel heterogeneous cointegration method to examine the presence of long-run cointegrating relationships. For robustness checks, another two proxies of economic uncertainty are applied. Findings: We demonstrate that there exists an obvious long run cointegrating relationships between real money demand and their determinants, namely, the real income, the nominal interest rate, the exchange rate and economic policy uncertainty. Research limitations/implications: The estimated results from the panel heterogeneous cointegration method demonstrate that economic uncertainty from uncertain government policy can act as an explanatory indicator about unknown future economic events, which could assist policy makers in fine-tuning the money demand function to provide the most desirable liquidity support for improved macroeconomic stability. Originality/value: This study applies the panel cointegration method in 28 representative economies for a n augmented money demand function.