The Stability Of The Money Demand Function In South Africa: A VAR-Based Approach

Abstract

The study examines the stability of the money demand function from 1994 to 2012 using quarterly data. The study utilises the Johansen co-integration to analyse the long-term relationship between the money demand function and its determinants. The CUSUM and CUSUMSQ were also used to examine the stability of the South African money demand function. The co-integration test proved that there exists a long-term relationship between the money demand function and its determinants. However, the CUSUM and CUSUMSQ proved that the South African money demand was unstable from 2003 to 2007. This therefore justifies the use of the repo rate as a monetary policy tool as compared to the monetary aggregates.