An Exposition on the Demand for Money
Oluremi Ogun

The demand for money had been known to be key to understanding the choice and effectiveness of monetary policy instruments. A detailed study of the subject was usually directed towards this ideal. In this paper, an investigation of the demand for money theory of Milton Friedman was undertaken. A clarification of the theory was deemed necessary to eliminate misconception. The data of a developing market economy, covering the period, 1971-2008, were employed to test the theory. Four different types of monetary aggregates were analyzed in the paper – currency, narrow money, quasi-money and broad money. Modern time series techniques were employed in the study. An investigation of the time series properties of the data employed was undertaken with the outcome however precluding error correction parameterization of the different models. In the alternative models, the parsimonious equations underscored the creditable performances of both the fundamental variable and relative prices at explaining the demand for monetary aggregates. Overall, the study generated important policy implications for monetary policy formulation and financial markets’ dynamics in all market economies. The paper hence, theory, was a contribution to understanding the dynamics of portfolio holdings in the macroeconomy.

Full Text: PDF     DOI: 10.15640/jeds.v8n3a7