Money Demand in Australia: Which Monetary Aggregate Matters?

Economic Papers, Vol. 33, No. 1, pp. 95-103

Posted: 25 Oct 2018

See all articles by Sokchea Lim

Sokchea Lim

John Carroll University

Channary Khun

Southern Illinois University at Carbondale

Date Written: March 2014

Abstract

We examine the long-run relation linking the demand for money in Australia to economic activity and the interest rate for an extended period from 1976 to 2010. Using the Johansen cointegration test, we test the relationship for three measures of monetary aggregate – currency, M1 and M3. The results provide evidence for a long-run equilibrium relation linking the demand for M1 to economic activity and the interest rate. The relationship is stable with unitary income elasticity and sizeable interest rate semi-elasticity. The evidence may open a new debate for the Reserve Bank of Australia to look into the use of M1 as a tool in implementing its monetary policy after a long-time abandonment of M3.

Keywords: Demand for Money, Johansen Cointegration Test, Monetary Aggregate

JEL Classification: E41

Suggested Citation

Lim, Sokchea and Khun, Channary, Money Demand in Australia: Which Monetary Aggregate Matters? (March 2014). Economic Papers, Vol. 33, No. 1, pp. 95-103, Available at SSRN: https://ssrn.com/abstract=3258923

Sokchea Lim (Contact Author)

John Carroll University ( email )

1 John Carroll BLVD
University Heights, OH 44118
United States

Channary Khun

Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

HOME PAGE: http://www.siu.edu

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