An Econometric Analysis of Money Demand in Taiwan, 1950-1989

By Arize, A. C. | American Economist, Spring 1994 | Go to article overview
Save to active project

An Econometric Analysis of Money Demand in Taiwan, 1950-1989


Arize, A. C., American Economist


1. Introduction

The demand for money has probably been studied more intensively than the demand for any other asset--real or financial. This interest in the demand for money is because of its central importance to both economic theory and policy. Consequently, money demand functions have been empirically estimated by many researchers for a number of industrial and developing countries.(1)

Relatively little systematic analysis of the behavior of private balances in Taiwan exists in the empirical literature. Such studies are of potential importance because inappropriate monetary policies can deprive a country of parts of the benefits of its development effort no matter how well the economic growth program is in other respects. With respect to economic development, it may seem that monetary policy is irrelevant to developing economies because of the lack of well developed financial and capital markets. However, as stressed by Gurley and Shaw (1967), and Abdi (1977), monetary policy can still play a major role in mobilizing savings into real capital and promoting financial stability; this would, in turn, contribute to the development of efficient financial and capital markets. Indeed, the government of Taiwan relied heavily on domestic monetary policies to support its export promotion policies in the 1970s and 1980s. See Liang and Liang (1988: 121-125) for a more detailed discussion.

The purpose of this study is to estimate an appropriate money demand function for Taiwan, a country which, to the best of my knowledge, has been the subject of very little economic analysis. One possible reason for this may be that data on this economy are only now becoming available. For example, quarterly data on the relevant variables are available for the period 1985 through 1988 only, whereas GNP data are available on an annual basis only. In this study, annual data are used and cover the period 1950 through 1989, that is, 40 observations.(2)

Several initial comments about the paper are worth making. First, it starts by establishing the time-series properties of the individual variables in the money demand function. The aim here is simply to show that the variables are integrated of the same order. The sampling distribution of the OLS estimator is not well behaved if the disturbance is non-stationary: The distribution of OLS estimator does not have finite moments, and, furthermore, OLS is inconsistent in general. If a unit root is present, it is essential to first difference the variables, thereby eliminating the unit root and achieving stationarity before attempting to estimate the money demand model. For this purpose, we use the augmented Dickey-Fuller (ADF) test as recommended by Engle and Granger (1987) in addition to the Durbin-Watson statistic suggested by Sargan and Bhargava (1983) to determine whether the time series are stationary in first differences or levels. Furthermore, we report the Z([[Phi].sub.3]) statistic suggested by Perron (1988). Second, efforts are made to examine the extent to which domestic money holdings are influenced by foreign interest rate considerations. Several researchers [for example, Arango and Nadiri (1981), and Arize et al. (1990)] have concluded that in estimating demand for money in small developing economies, the international opportunity costs of holding money balances should at least be considered along with the domestic counterpart. To examine this issue in the case of Taiwan, foreign interest rates are proxied by U. S. government bond yield (medium-term).(3) Third, modeling the dynamic adjustment of the model we use the error-correction procedure. The error correction methodology follows that in Engle and Granger (1987). Fourth, particular attention is given to testing for higher-order autocorrelation, functional form misspecification, heteroskedasticity, and normality of the residuals. Finally, the paper examines whether the Taiwan money-demand relationship has shifted during the period of estimation.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

An Econometric Analysis of Money Demand in Taiwan, 1950-1989
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?