An Investigation Into The Demand For Broad Money In South Africa

Abstract

A stable money demand function plays a vital role in the planning and implementation of monetary policy. With the use of Johansen co-integration and error correction model estimates, this study examines the existence of a stable long-run relationship between real broad money demand ( RM3) and its explanatory variables in South Africa for the period 1990-2009. In contrast to previous analyses, this study augments the co-integration and vector autoregression (VAR) analysis with impulse response and variance decomposition analyses to provide robust long-run effects and short-run dynamic effects on the real money demand. In addition, this study introduces a foreign interest rate to capture the impact of capital mobility on money demand in South Africa. Results from the Johansen test suggest that real broad money demand (RM3) and its all explanatory variables are cointegrated.