Money demand function for Southeast Asian countries: An empirical view from expenditure components

Abstract

Purpose

The purpose of this paper is to empirically investigate the money demand function for five Southeast Asian countries, viz. Malaysia, Thailand, Singapore, the Philippines, and Indonesia.

Design/methodology/approach

The ARDL modeling approach is employed because of its ability to incorporate both I(0) and I(1) regressors.

Findings

The results reveal that real M2 aggregate, real expenditure components, exchange rate, and inflation rate are cointegrated for Malaysia, the Philippines, and Singapore. The statistical significance of real income components suggests the bias of using single real income variable in money demand (M2 aggregate) specification of both short‐ and long‐run. The CUSUM and CUSUMSQ tests show that the estimated parameters are stable for the five Southeast Asian economies, except for Indonesia which is based on short‐run specification.

Practical implications

These findings are important for policy makers in formulating monetary policy.

Originality/value

Besides conventional determinants of money demand such as exchange rate and interest rate variables, this study considers the major components of final expenditure (GDP) – final consumption expenditures (private and government sectors), expenditures on investment goods, and exports as scale variables.

Citation

Cheong Tang, T. (2007), "Money demand function for Southeast Asian countries: An empirical view from expenditure components", Journal of Economic Studies, Vol. 34 No. 6, pp. 476-496. https://doi.org/10.1108/01443580710830952