Modelling long-run money demand: a panel data analysis on nine developed economies

Abstract

In  this article, we investigate the presence of a long-run money demand in a selected group of nine developed OECD countries (G7 plus Australia and Switzerland). Our estimations are based on panel DOLS and between-dimension group-mean panel DOLS introduced by Mark and Sul (2003) and Pedroni (2001), respectively. We employ income and wealth as alternative scale variables to model two money demand functions using quarterly data for the period 1982 to 2008. Our results highlight the role of total wealth in the determination of money demand with a positive elasticity. Moreover, a parameter stability analysis suggests that estimated money demand with the inclusion of wealth is more stable.

Keywords:

• money demand
• wealth
• panel DOLS
• panel cointegration

JEL Classification:

• E41
• E52
• C23

Acknowledgements

We are grateful to an anonymous referee for helpful comments and suggestions.

Funding

Pasquale Foresti acknowledges financial support from the European Social Fund and the Regione Calabria. The funding institutions deny any responsibility for the content of this article and the authors are the sole responsible for the views expressed.

Notes

¹  As in most of the studies on money demand, we take money, income, wealth and the exchange rate in logarithms.

²  In some studies, lead and lagged differences of the dependent variables are also added as instruments (see Dreger et al., 2007).

³  It is worth noting that, among all the Pedroni tests, the ADFs have the highest power in small samples (see Pedroni, 2004).