Money demand function in selected Asian countries

The aim of this study is to estimate and test the stability of the money demand function of five selected Asian countries (Republic of Korean, Malaysia, Singapore, Taiwan and Turkey) considering the structural changes for the period of 1991:Q1-2015:Q2. In this study, narrow (M1) and broad (M2) standard money demand functions (as functions of income and interest rate) have been estimated separately. Firstly the stationary of the series have been tested by using ADF and LM unit root test under two structural breaks. According to the results of these tests monetary aggregates, real income and interest rate series are stationary at the first difference I(1). After that, employing Johansen and Gregory Hansen cointegration tests, has been showed the presence of cointegration between narrow money supply (M1) and the determinants of money demand. For broad monetary aggregate (M2), The existence of the cointegration has been found by using Johansen test but the findings of Gregory Hansen test do not support the presence of cointegration in many cases. The presence of structural changes in money demand function may cause to instability of the function. Therefore Structural changes shouldn't be ignored in estimation of the money demand function. The CUSUMSQ test has been applied on estimated money demand functions for the 1991:Q1-2015:Q2 period. The findings of this test shows the instability of money demand functions of all selected countries except the broad money demand function of Malaysia. Therefore, structural change of money demand functions have been presented with the method of Bai and Perron. After that the functions of sub periods have been estimated by using OLS method. While the empirical findings showed the instability of the money demand functions of all selected countries for the period of 1991:Q1:2015:Q2, the function of sub periods are stable in many cases.