Money Demand in the Arab Republic of Egypt : A Vector Equilibrium Correction Model

Rostom, Ahmed

World Bank, Washington, DC

关键词: ARBITRAGE OPPORTUNITIES;    BANKING;    EXCHANGE RATES;    FINANCIAL LIBERALIZATION;    FINANCIAL MARKETS;   

DOI  :  10.1596/1813-9450-7679
RP-ID  :  WPS7679

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

Money demand is critical for definingmonetary policy options and is not driven necessarily bydeveloped country standards of transaction demand,speculation motive, and opportunity costs grounded by fullyfunctioning financial markets. However, market imperfectionsin less developed economies can also play a critical role inthe dynamics of demand for money. This paper estimates avector equilibrium correction model to investigate thenature of short-term and long-term interactions for moneydemand in the Arab Republic of Egypt. The paper concludesthat real money demand in Egypt during (1958-2013) is stableand can be considered confidently by monetary authorities toadjust for long-term growth in the real economy. The rate ofdevaluation of the official exchange rate and inflation havea serious effect on the public's trust in the nationalcurrency in the long term. Money is not neutral forlong-term portfolio decisions, because of the increase inreal income in the economy that couples with an uptrend inmonetization as the ratio of money stock over output alsouptrends. The paper also provides quantitative evidence thatthe devaluation within the parallel market is negativelyrelated to the change in demand for real money balances inthe short term. Economic agents hold more domestic currencyif the official exchange rate slides, and arbitrageopportunities are sought in the parallel market.