An Empirical Study of the Stability of Money Demand

Abstract

This study aimed to determine the factors affecting the money demand in Jordan during the period (1993-2019). In addition, we examine the effect of stock market activity on money demand by using the Autoregressive distributed lag (ARDL) bound testing cointegration model. The model analyzes the dynamic relationships between the dependent variable (money demand) and independent variables (gross domestic product, inflation, interest rate, stock price, and government expenditure). In addition, the CUSUM and CUSUMSQ tests were used to investigate the stability of the money demand function, which is an essential part of a successful monetary policy. The results showed that, in the long run, stock prices, inflation, and interest rates all have significant positive effects on money demand, while government spending and interest rates have considerable negative impacts. In addition, in the short run, stock prices and gross domestic product have a significant positive relationship with money demand, while interest rate and government expenditures have a significant negative relationship with money demand. Moreover, the results show that the money demand function was stable, implying a successful monetary policy. This study is beneficial for the central bank of Jordan to build an effective monetary policy and consider the importance of the stock market activity to generate a long-term efficacious money demand function.