Money demand stability in Egypt using ARDL Model

Document Type : Original Article

Authors

1 Instructor in the Economics and Public Finance department Faculty of Commerce Tanta University Tanta Egypt

2 Economics Instructor at the Higher Institute of Management and Information Technology Kafr El-Sheikh Egypt

Abstract

This research aims to study money demand stability in Egypt using Autoregressive Distributed Lag Model (ARDL), stability tests CUSUM and CUSUMSQ, and Friedman’s money demand equation after it was adjusted. Also, this research aims to study causality relation among money demand and output and inflation using Granger Causality Test. The study found that the demand for money in Egypt is stable and there is a significant relation between money demand and independent variables: output, real interest rate, exchange rate and foreign interest rate. There is a positive and significant relation between money demand and output. However, there is a negative and significant relation between money demand and real interest rate. Also, there is a negative and significant relation between money demand and foreign interest rate. Nevertheless, there is a positive and significant relation between money demand and exchange rate. Thus, the monetary authority in Egypt can target the broad money supply, as intermediate target of monetary policy, to achieve the final objectives of monetary policy. Also, the monetary authority in Egypt can achieve the stability of money demand and money market by decreasing the fluctuations in output, exchange rate and real interest rate.

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