Abstract
The demand for money has received a great deal of attention in the empirical literature. This literature, however, has emphasized factors such as interest rate, income, inflation rate and exchange rate as the primary determinants of money demand. Although an emerging strand of literature examines uncertainty as a potential determinant of money demand, findings have been mixed. Using a news-based Economic Policy Uncertainty (EPU) index and Australian quarterly data from 1998 to 2017, we study the impact of policy uncertainty on demand for money. Autoregressive distributed lag (ARDL) results show that the economic policy uncertainty measure has a negative short-run effect on the demand for money, suggesting the wider public hedge against future expected inflation, and positive long-run effect, whereby the broader public hold more cash to stay liquid during times of economic uncertainty. Also, introducing nonlinearity into the money demand equation, we find an asymmetric effect, more in favour of currency appreciations, supporting the expectations effect of further appreciations in exchange rate movements.
| Original language | English |
|---|---|
| Pages (from-to) | 5416-4526 |
| Number of pages | 11 |
| Journal | Applied Economics |
| Volume | 51 |
| Issue number | 41 |
| DOIs | |
| Publication status | Published - 2019 |
Keywords
- Australia
- demand for money
- Money demand
- policy uncertainty
Cite this
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Economic policy uncertainty and demand for money in Australia. / Ivanovski, Kris; Churchill, Sefa Awaworyi.
In: Applied Economics, Vol. 51, No. 41, 2019, p. 5416-4526.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - Economic policy uncertainty and demand for money in Australia
AU - Ivanovski, Kris
AU - Churchill, Sefa Awaworyi
PY - 2019
Y1 - 2019
N2 - The demand for money has received a great deal of attention in the empirical literature. This literature, however, has emphasized factors such as interest rate, income, inflation rate and exchange rate as the primary determinants of money demand. Although an emerging strand of literature examines uncertainty as a potential determinant of money demand, findings have been mixed. Using a news-based Economic Policy Uncertainty (EPU) index and Australian quarterly data from 1998 to 2017, we study the impact of policy uncertainty on demand for money. Autoregressive distributed lag (ARDL) results show that the economic policy uncertainty measure has a negative short-run effect on the demand for money, suggesting the wider public hedge against future expected inflation, and positive long-run effect, whereby the broader public hold more cash to stay liquid during times of economic uncertainty. Also, introducing nonlinearity into the money demand equation, we find an asymmetric effect, more in favour of currency appreciations, supporting the expectations effect of further appreciations in exchange rate movements.
AB - The demand for money has received a great deal of attention in the empirical literature. This literature, however, has emphasized factors such as interest rate, income, inflation rate and exchange rate as the primary determinants of money demand. Although an emerging strand of literature examines uncertainty as a potential determinant of money demand, findings have been mixed. Using a news-based Economic Policy Uncertainty (EPU) index and Australian quarterly data from 1998 to 2017, we study the impact of policy uncertainty on demand for money. Autoregressive distributed lag (ARDL) results show that the economic policy uncertainty measure has a negative short-run effect on the demand for money, suggesting the wider public hedge against future expected inflation, and positive long-run effect, whereby the broader public hold more cash to stay liquid during times of economic uncertainty. Also, introducing nonlinearity into the money demand equation, we find an asymmetric effect, more in favour of currency appreciations, supporting the expectations effect of further appreciations in exchange rate movements.
KW - Australia
KW - demand for money
KW - Money demand
KW - policy uncertainty
UR - http://www.scopus.com/inward/record.url?scp=85063485313&partnerID=8YFLogxK
U2 - 10.1080/00036846.2019.1593936
DO - 10.1080/00036846.2019.1593936
M3 - Article
AN - SCOPUS:85063485313
VL - 51
SP - 5416
EP - 4526
JO - Applied Economics
JF - Applied Economics
SN - 0003-6846
IS - 41
ER -