The role of money demand in monetary policy

Abstract

This study uses cross-sectional time-series data from five (5) countries in estimating a money demand function. We found valid and consistent results for the money demand model and established a stable long run relationship between money demand and its regressors: real output, exchange rate, inflation rate and long and short-term interest rate. Stability tests conducted showed the presence of structural breaks possibly due to changes in monetary regimes and other financial deregulations. Money demand elasticities play a vital role in monetary policy formulation and the existence of a stable demand for money is very important, even in the use of inflation targeting, for the conduct of monetary policy even though its impact may not be explicitly seen.