Estimation of money demand function for selected countries; a panel data analysis

ABSTRACT: This study evaluates the nature of the demand for broad money (M2) in seven selected countries of Australia, Canada, Hungary, Iceland, Singapore, South Africa, and Switzerland as a panel data analysis. This is important in a sense that money demand function in monetary policies rely on its permanency. A set of expletory researches were conducted regarding quantity of real money demand function in developing and developed countries with similar financial sector in order to well understanding of the nature of modeling. In particular, the thesis uses annual data about real money demand (M2/P), nominal interest rate (INT), real gross domestic product (GDP) and financial development (G) to estimate the income and interest rate elasticity of money demand for this sample of countries. In this study also the relationship of financial development and quantity of real money demand are being investigated. The methodology will be based on panel data regression analysis with fixed effect. The sample period of study will be between 1985-2010 years. The quantity theory of money states that, the long term income elasticity needs to be close to the value one which is consistent with our finding of 0.7739. The coefficients obtained of real income, interest rate, and financial developments are as expected and significant. Consequently, the long run demand for money (M2) in selected countries as a group was positively related to real income and financial development and negatively related to nominal interest rate. Keywords: Money Demand Estimation, Interest Rate, GDP, Panel, Regression Analysis. …………………………………………………………………………………………………………………………