Determination of Long and Short Run Demand for Money in the West African Monetary Zone (WAMZ) Countries: A Panel Analysis

Agya Atabani Adi; Joshua Sunday Riti

doi:10.33119/ERFIN.2017.2.2.2

Agya Atabani Adi Department of Economics, Federal University Wukari, Nigeria
Joshua Sunday Riti Department of Economics, University of Jos, Nigeria

DOI: https://doi.org/10.33119/ERFIN.2017.2.2.2

Keywords: Demand for Money, Interest Rate Spread, Capital Mobility, Currency Substitution, Panel Analysis

Abstract

This paper examines demand for real money balances in six West African countries from 1985–2014 using a panel cointegration technique. Real income and inflation rate positively affect demand for money, whereas interest rate spread, real effective exchange rate, and the U.S. real interest rate negatively affect broad money demand in the long run. Income elasticity is greater than unity in the long term and less than unity in the short term. All the variables examined are significant except effective exchange rate. Both the currency substitution and capital mobility hypotheses hold for the long run, but only the capital mobility hypothesis holds in the short run. We recommend that monetary aggregate grow more slowly than economic growth to maintain price stability. Countries should maintain a stable exchange rate and ensure a market driven interest rate policy.

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