Asymmetrical effects of real exchange rate on the money demand in Saudi Arabia: A nonlinear ARDL approach

Abstract

This present research investigates the money demand function of Saudi Arabia using a long period 1968–2016. In addition, the asymmetrical effects of real exchange rate changes have also been explored in the estimated money demand function. Our empirical results suggest that income and inflation have positive and negative effects on money demand respectively. Further, a real appreciation of US dollar has a positive effect but a real depreciation has a negative effect on the money demand. Furthermore, income and price homogeneity hypotheses do not hold for the estimated elasticities. Moreover, the estimated model is found stable with the theoretically expected effects of money demand’s determinants. Therefore, we are suggesting money supply as a monetary policy instrument to the economy of Saudi Arabia.