Estimation of the money demand function on a heterogeneous panel for selected Asian countries

Despite the large number and variety of studies examining the money demand function, only a few have a utilized panel data approach in estimating the open money demand function. This paper used the Pedroni panel cointegration approch aling with a fixed-effect estimation method to estimate the open money demand function for 12 selected countries over the period of 1974-2010. Cointegration test results indicate that money demand as measured by M1 and M2 shares a long run equilibrium relationship with key explanatory variables. As anticipated, we find that real GDP exerts significantly positive impacts in the demand for real money balances. Among other variables, the interest rate and the exchange rate are found to influence a negative impact on money demand of M1 in the 12 selected countries. We further find that, compared with M2, the cointegration relationship is much stronger for the M1 money demand function.