Literature reviewed on the performance
of demand for money function and inflation in
Asian countries have widely been discussed in the context
of structural shifts in the economy
that occurred due to financial markets deregulation (interest
rate, credit availability, and exchange
rate), innovations, and deepening of the financial markets.
For instance, Dekle and Pradhan
(1999) examined the implication of financial liberalization
on ASEAN-5 (i.e., Indonesia, Malaysia,
Philippines, Singapore, and Thailand). They found that
reforms that increase the number of
banks and raise technological advances (credit cards usage
and electronic transfers) increased
the velocity of broad money as these changes in the economy
make it easier to interchange
money and its substitutes. Further, studies on the impact
of the financial crisis on macroeconomic
performance among the Asian countries have largely been
confined to analysis of the exchange
rate movements, current account position, and output growth
(Chang and Velasco, 1998 and
2001; Goldstein, 1998; Mishkin, 1999; and Ariff and Khalid,
2000). Currency crisis (and the
attendant inflationary effects) is a recent phenomenon
to affect money demand that is yet to
gain traction. In this context, it is imperative to examine
the implication of the currency crisis on
inflation and demand for broad money as this affects the
conduct of monetary policy, and
therefore the macroeconomic stability in the economy.
In terms of the effect of structural breaks on money demand
estimation, Butkiewicz and
McConnell (1995) and Andoh and Chappell (2002) examined
the impact of macroeconomic
adjustment policies on stability of money demand function.
They found evidence of a structural
break in the demand for money function after financial
reforms in the US and Ghana.
In an investigation of European Monetary System (EMS),
Cheung et al. (1995) argued that breaks
in the data may bias the cointegration test towards finding
no cointegration if one fails to
account for structural breaks in model specification. Bahamani-Oskooee
and Shabsigh (1996)
analyzed the stability of demand for narrow (M1) and broad
(M2) money functions in Japan.
They found that the M1 money demand function to be stable
with or without incorporating the
effective exchange rate. However, M2 was stable only when
effective exchange rate was included
in the model. |
