Analysis of Demand Function for Money in Saudi Arabia: 1970-2005

(Mohamed Abdel Wahed Mohamed and Hassan Rphian Alahjhoj)

---

Abstract

The objective of this paper is to analyze money demand function in Saudi Arabia during the period (1970-2005). This is to determine money demand function determinants, the speed of adjustment and its stability to help in selecting the appropriate monetary policy. Two econometric models of money demand functions were designed to test the short and long-teim functions. We used cointegration technique for Johansen through error correction model (ECM) to estimate the two econometric techniques. Also, stability tests were applied to test the stability of money demand function in Saudi Arabia. The results revealed that variables of scale (GDP) and opportunity cost (real interest rate, inflation rate and real effective exchange rate) are the long-run determinants of money demand in Saudi Arabia. The same determinants, with the exclusion of inflation rate, affect the short-run money demand function in Saudi Arabia. The results revealed the slow adjustment between the real and the desired money demand. Finally, the results revealed the stability of money demand function in Saudi Arabia in both short and long run.
PDF

References