Money Demand in the Arab Republic of Egypt : A Vector Equilibrium Correction Model
Money demand is critical for defining monetary policy options and is not driven necessarily by developed country standards of transaction demand, speculation motive, and opportunity costs grounded by fully functioning financial markets. However, ma...
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| Language: | English en_US |
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World Bank, Washington, DC
2016
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| Online Access: | http://documents.worldbank.org/curated/en/2016/05/26379177/money-demand-arab-republic-egypt-vector-equilibrium-correction-model http://hdl.handle.net/10986/24517 |
| Summary: | Money demand is critical for defining
monetary policy options and is not driven necessarily by
developed country standards of transaction demand,
speculation motive, and opportunity costs grounded by fully
functioning financial markets. However, market imperfections
in less developed economies can also play a critical role in
the dynamics of demand for money. This paper estimates a
vector equilibrium correction model to investigate the
nature of short-term and long-term interactions for money
demand in the Arab Republic of Egypt. The paper concludes
that real money demand in Egypt during (1958-2013) is stable
and can be considered confidently by monetary authorities to
adjust for long-term growth in the real economy. The rate of
devaluation of the official exchange rate and inflation have
a serious effect on the public's trust in the national
currency in the long term. Money is not neutral for
long-term portfolio decisions, because of the increase in
real income in the economy that couples with an uptrend in
monetization as the ratio of money stock over output also
uptrends. The paper also provides quantitative evidence that
the devaluation within the parallel market is negatively
related to the change in demand for real money balances in
the short term. Economic agents hold more domestic currency
if the official exchange rate slides, and arbitrage
opportunities are sought in the parallel market. |
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