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Stability of the Money Demand Function Revisited: Evidence from Sierra Leone

Received: 19 May 2022     Accepted: 6 June 2022     Published: 14 June 2022
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Abstract

The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.

Published in International Journal of Economics, Finance and Management Sciences (Volume 10, Issue 3)
DOI 10.11648/j.ijefm.20221003.15
Page(s) 122-133
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2022. Published by Science Publishing Group

Keywords

Money Demand, Monetary Policy, Narrow Money, Broad Money, ARDL, CUSUM, CUSUMSQ

References
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[3] Bahmani-Oskooee, M. & Gelan, A. (2009). How Stable is the Demand for Money in African Countries? Journal of Economies Studies, 36 (3), 216-235.
[4] Boucekkine, R., Laksaci, M. & Touati-Tliba, M. (2021). Long-run Stability of Money Demand and Monetary Policy: The Case of Algeria. Halshs-03120699. (Aval.: https://halshs.archieves-ouvertes.fr/halshs-03120699).
[5] Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society, 37, 149-192.
[6] Caprio, G. & Honohan, P. (1991). Monetary Policy Instruments for Developing Countries: A World Bank Symposium. The International Bank for Reconstruction Development, 1818 H Street, N. W., Washington D.C. 20433, U.S.A.
[7] Dagher, J. & Kovanen, A. (2011). On the Stability of Money Demand in Ghana: A Bounds Testing Approach. IMF Working Paper, WP/11/273.
[8] Drama, B. G. & Yao, S. (2010). The Demand for Money in Cote d’Ivoire: Evidence from the Cointegration Test. School of International Business and Management, Shanghai University Working Paper, WP No. 20131. (Aval. https://mpra.ub.uni-muenchen.de).
[9] Friedman, M. (1970). A Theoretical Framework for Monetary Analysis. Journal of Political Economy, 78 (2), 193-238.
[10] Fisher, I. (1911). The purchasing power of money, New York: Macmillan.
[11] Kallon, K. M. (1992). Analysis of Money Demand in Ghana. The Journal of Developing Areas, 26 (4), 475-488.
[12] Kallon, K. M. (2009). The Demand for Money in Sierra Leone Revisited. Journal of African Development, African Finance and Economic Association, 11 (1), 41-59.
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[16] Mansaray, M. & Swaray, S. (2013). Financial Liberalization, Monetary Policy and Money Demand in Sierra Leone. Journal of Monetary and Economic Integration, 63-87.
[17] Narayan, P. K. (2004). Reformulating critical values for the bounds F-statistics approach to cointegration: an application to the tourism demand model for Fiji. (Dep. of Econ. Discussion Paper 04/04). Department of Economics. Monash University, Victoria 3800, Australia. Retrieved February 2011, from http://arrow.monash.edu.au
[18] Nchor, d. & Adamec, V. (2016). Investigating the Stability of Money Demand in Ghana. Procedia-Social and Behaviour Sciences, Elsevier, 220, 288-293. (Available on: www.sciencedirect.com).
[19] Niyimbanira, F. (2013). Stability of Money Demand in a Developing Economy: Empirical Evidence from South Africa. International Business and Economics Research Journal, 12 (5), 565-572.
[20] Owoye, O. & Onafowora, O. A. (2007). M2 Targeting, Money Demand, and Real GDP Growth in Nigeria: Do Rules Apply? Journal of Business and Public Affairs, 1 (2), 1-20.
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  • APA Style

    Saidu Swaray. (2022). Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. International Journal of Economics, Finance and Management Sciences, 10(3), 122-133. https://doi.org/10.11648/j.ijefm.20221003.15

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    ACS Style

    Saidu Swaray. Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. Int. J. Econ. Finance Manag. Sci. 2022, 10(3), 122-133. doi: 10.11648/j.ijefm.20221003.15

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    AMA Style

    Saidu Swaray. Stability of the Money Demand Function Revisited: Evidence from Sierra Leone. Int J Econ Finance Manag Sci. 2022;10(3):122-133. doi: 10.11648/j.ijefm.20221003.15

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  • @article{10.11648/j.ijefm.20221003.15,
      author = {Saidu Swaray},
      title = {Stability of the Money Demand Function Revisited: Evidence from Sierra Leone},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {10},
      number = {3},
      pages = {122-133},
      doi = {10.11648/j.ijefm.20221003.15},
      url = {https://doi.org/10.11648/j.ijefm.20221003.15},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20221003.15},
      abstract = {The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.},
     year = {2022}
    }
    

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  • TY  - JOUR
    T1  - Stability of the Money Demand Function Revisited: Evidence from Sierra Leone
    AU  - Saidu Swaray
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    T2  - International Journal of Economics, Finance and Management Sciences
    JF  - International Journal of Economics, Finance and Management Sciences
    JO  - International Journal of Economics, Finance and Management Sciences
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    PB  - Science Publishing Group
    SN  - 2326-9561
    UR  - https://doi.org/10.11648/j.ijefm.20221003.15
    AB  - The study empirically examined the stability of the money demand function that justifies the adoption of the monetary aggregate targeting framework by the Bank of Sierra Leone using quarterly data spanning from 2002 to 2018. To account for structural breaks emanating from policy shocks and regime shifts in the data such as the civil unrest from 1991-2002, the Ebola Virus Disease (EVD) outbreak from 2014-2016, the mudslide in 2017 and other global shocks, the study conducted unit root tests with structural breaks and regime shift. The long-run estimates of the ARDL model confirm the stability of the money demand functions. In particular, the results show high income elasticity of money demand when narrow money was used as the dependent variable, implying a cash based economy that requires serious consideration in the conduct of monetary policy. Given that the economy is still rudimentary with high propensity of underground economic activities, it is palpable that monetary policy will continue to be challenged especially when the central bank continues to struggle in mopping up excess liquidity in the banking system as a result of the enormous shadow activities in the country. Hence, any policy that is geared towards targeting the narrower definition rather than broader definition of money could help mitigate the challenges associated with withdrawing excess liquidity from the banking system and thus enhances the conduct of an effective monetary policy.
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Author Information
  • Research & Statistics Department, Bank of Sierra Leone, Freetown, Sierra Leone

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