Stability of Money Demand Function in the SAARC Region: A Panel Co-Integration Approach

This study explores the causality relationships between money demand, real income, price, and interest rate by focusing on South Asia for the period between 1986 and 2017 using panel data econometrics. Our estimations based on panel auto-regressive distributed lag (ARDL) reveal a significant and positive long-run relationship between real income and money demand, while a negative relationship exists with interest rate and price. The panel vector error correction model causality results highlight a feedback relationship between money demand and real income, but a short-run unidirectional causality between price and interest rate and real income. We also discover long-run bidirectional causality among these variables. Our results indicate that the money demand function was stable in South Asian economies during the time period considered by this study. Therefore, the central bank of these countries can use money supply as an appropriate instrument to manage monetary policy to achieve overall price and macroeconomic stability.