Relationship of Fiscal Discipline and Household Income on Money Demand Function in Sri Lanka

Dawood MAMOON, Umbreen IFTIKHAR, Muhammad Shahid HASSAN

Abstract


Abstract. This paper attempts to find those determinants stirring the function of money demand in Sri Lanka during 1975-2013. The empirical analysis starts from applying the unit root tests i.e. Ng-Perron. We apply ARDL bound testing approach of co-integration to scrutinize the co-integration in variables. We select independent variables like per capita GDP, interest rate, exchange rate, fiscal deficit, urban population and rural population to determine money demand function. The findings revealed that income, interest rate and fiscal deficit effect money demand significantly and positively. The exchange rate affects negatively and significantly upon money demand. The stable money demand function is found over time applying CUSUM and CUSUMSQ stability test. The model of our study strongly recommends the real demand for M2 is vital monetary aggregate in terms of policy implication including the appropriateness of model in Sri Lanka.

Keywords. Sri Lanka, Money demand, Income, Interest rate, Exchange rate, Fiscal deficit, Urban and Rural Population.

JEL. D10, E41, E59.


Keywords


Sri Lanka; Money demand; Income; Interest rate; Exchange rate; Fiscal deficit; Urban and rural population.

Full Text:


References


Abdullah, H., Ali, J., & Matahir, H. (2010). Re-examining the Demand for money in Asean-5 countries. Asian Social Science , 6 (7), 146-155. doi. 10.5539/ass.v6n7p146

Anwar, S., & Asghar, N. (2012). Is demand for smoney is stable in pakistan? Pakistan Economic and Social Review, 50(1), 1-22.

Arize, A.C., & Nam, K. (2012). The demand for money in Asia:Some further evidence. International Journal of Economics and Finance, 4(8), 59-71. doi. 10.5539/ijef.v4n8p59

Azim, P., Ahmed, N., Ullah, S., Zaman, B.U., & Zakaria, M. (2010). Demand for money in Pakistan: an ARDL approach. Global Journal of Management and Business Research, 10(9), 76-80.

Baumol, W.J. (1952). The transactions demand for cash: An inventory theoretic approach. Quarterly Journal of Economics , 66(4), 545-556. doi. 10.2307/1882104

Dharmadasa, C., & Nakanishi, M., (2013). Demand for money in Sri Lanka: ARDL approach to co-integration. 3rd International Conference on Humanities, Geography and Economics (ICHGE'2013). Bali (Indonesia), pp.143-147.

Faridi, M.Z., & Akhtar, M.H. (2013). An estimation of money demand function in Pakistan: Bound testing approach to co-integration. Pakistan Journal of Social Sciences, 33(1), 11-24.

Friedman, M. (1956). The Quantity Theory of Money a Restatement. University Chicago Press.

Fisher, I. (1911). The Purchasing Power of Money. New York: Macmillan.

Jegajeevan, S. (2009). An examination of stability of demand for money in Sri Lanka: Implications for monetary policy. Proceedings of International Conference on Business Management. [Retrieved from].

Keynes, J.M. (1936). The General Theory of Employment, Interest, and Money. London and New York: Macmillan.

Khan, A., & Sajjid, M. Z. (2005). The Exchangr Rate and Monetary Dynamics in Pakistan:An Autoregressive Distributed Lag (ARDL) Approach. The Lahore Journal of Economics, 10(2), 87-99.

Khrawish, H.A., Khasawneh, A.Y., & Khrisat, F.A. (2012). The impact of budget deficits on money demand in Jordan: Co-integration and vector error correction analysis. Journal of Investment Management and Financial Innovations, 9(2), 101-108.

Mall, S. (2013). Estimating a function of real demand for money in Pakistan: An application of bounds testing approach to cointegration. International Journal of Computer Applications, 79(5), 32-50. doi. 10.5120/13740-1548

Mundell, R.A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. The Canadian Journal of Economics and Political Science, 29(4), 475-485. doi. 10.1017/S0315489000030036

Narayan, P.K., Narayan, S., & Mishra, V. (2009). Estimating money demand function for South Asian Countries. Empirical Economics, 36, 685-696. doi. 10.1007/s00181-008-0219-9

Ng, S., & Perron, P. (2001). Lag length selection and the construction of unit root tests with good Size and power. Econometrica, 69(6), 1519-1554. doi. 10.1111/1468-0262.00256

Padhan, P. C. (2011). Stability of demand for money in India: Evidence from monetary and liquidity aggregates. International Journal of Economics and Finance, 3(1), 271-282. doi. 10.5539/ijef.v3n1p271

Pesaran, M.H., Shin, Y., & Smith, R.J. (2001). Testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326. doi. 10.1002/jae.616

Renani, H. S. (2007). Demand for money in Iran: An ARDL approach. MPRA Working Paper, No. 8224.

Salha, O.B., & Jaidi, Z. (2013). Some new evidence on the determinants of money demand in developing countries-A case study of Tunisia. The Journal of Economic Asymmetries, 11(1), 30-45. doi. 10.1016/j.jeca.2014.06.001

Sarwar, H., Sarwar, M., & Waqas, M. (2013). Stability of money demand function in Pakistan. Economic and Business Review, 15(3), 197-212.

Suliman, S.Z., & Dafaalla, H.A. (2011). An econometric analysis of money demand function in Sudan, 1960 to 2010. Journal of Economics and International Finance , 16(3), 793-800. doi. 10.5897/JEIF11.122

Tobin, J. (1956). The Interest Elasticity of the Transactions Demand for Cash. Review of Economics and Statistics , 38(3), 241-247. doi. 10.2307/1925776

Tobin, J. (1958). Liquidity preference as behavior towards risk. Review of Economic Studies, 25(2), 65-86. doi. 10.2307/2296205

Vamvoukas, G. A. (2010). The relationship between budget deficits and money demand: Evidence from a small economy. Applied Economics, 30(3), 375-382. doi. 10.1080/000368498325895

World Bank, World Development Indicators. (2013). [CD Rom 2012], World Bank, Washington, D.C .




DOI: http://dx.doi.org/10.1453/jeb.v4i1.1180

Refbacks

  • There are currently no refbacks.


.......................................................................................................................................................................................................................................................................................................................................

Journal of Economics Bibliography - J. Econ. Bib.  - JEB - www.kspjournals.org

ISSN: 2149-2387.

Editor: jeb@ksplibrary.org  Secretarial: secretarial@ksplibrary.org  Istanbul - Turkey.

Copyright © KSP Library