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Demand for M2 in Developing Countries: An Empirical Panel Investigation: Discussion Paper No. 149

Valadkhani, Abbas & Alauddin, Mohammad (2003) Demand for M2 in Developing Countries: An Empirical Panel Investigation: Discussion Paper No. 149. [Working Paper]

Abstract

A significant body of literature on developed countries support the view that disequilibrium in the money market can affect the future output gap and/or inflation. This paper examines the major determinants of the demand for real money balances in eight developing countries for which consistent annual time series data are available. Pooling cross-country and time series data for the 1979-1999 period and employing the seemingly unrelated regression (SUR) estimation technique, this paper models a standard money demand function. Various country-specific coefficients are allowed to capture inter-country heterogeneities. Consistent with theoretical postulates, this paper finds that the demand for money positively responds to an increase in real income and negatively to a rise in the interest rate spread, the rate of inflation and the US long-term interest rate. This study supports the hypothesis that disequilibrium in the money market can exacerbate inflation and widen the output gap.

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ID Code: 2911
Item Type: Working Paper
Keywords: Demand for Money, Interest Rate Spread, Panel Data
ISSN: 1324-5910
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2003 (please consult author)
Deposited On: 14 Dec 2005
Last Modified: 10 Aug 2011 22:59

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