Abstract

In this paper we attempt to construct a money demand function for Egypt, as determined by income, interest rate and inflation. The exercise was performed on quarterly data (1980:4 to 1996:4), but since a representative activity variable is not available at any frequency higher than annual, we had to generate quarterly GDP series assuming an ARIMA process. DF and ADF tests for stationarity and the ratio­-to-moving average test for seasonality were pe1formed, while the HEGY procedure was used to confirm the results of the simpler procedures. The series were found to be 1(1) and there was no evidence of deterministic or stochastic seasonality.

The Engle-Granger and the Johansen procedures were used to establish the long-run relationship between money demand and its determinants. The Johansen test found a significant cointegrating relationship between money and income, while the Engle-­Granger procedure failed to detect cointegration for any of the specifications. However, there was consistency between the Cochrane-Orcutt and the Johansen long­-run estimates for the money-income relationship. The inflation rate did not fit any of the specifications well, while the interest rate was shown to represent the own rate of return on money. The short-run dynamics constrained by the ECM formulation resulted in estimates that suggest almost instantaneous adjustment.

The question of money-to-income causality and asymmetries in the money-income relationship were also addressed, since the money demand function seems to depend mainly on the relationship between the two variables. It was shown that the relationship becomes stronger when economic activity declines. The results of the exercise could be improved if a relevant opportunity cost of holding money is generated and higher frequency data is available so that the sample period can be limited to the 90s.

School

School of Business

Department

Economics Department

Degree Name

MA in Economics

Date of Award

2-1-1999

Online Submission Date

7-1-1998

First Advisor

William Mikhail

Committee Member 1

William Mikhail

Committee Member 2

Adel Beshai

Committee Member 3

Nagla E. Rizk

Document Type

Thesis

Extent

139 leaves

Library of Congress Subject Heading 1

Monetary policy

Library of Congress Subject Heading 2

Inflation (Finance)

Rights

The American University in Cairo grants authors of theses and dissertations a maximum embargo period of two years from the date of submission, upon request. After the embargo elapses, these documents are made available publicly. If you are the author of this thesis or dissertation, and would like to request an exceptional extension of the embargo period, please write to thesisadmin@aucegypt.edu

Call Number

Thesis 1998/59

Location

mgfth

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Economics Commons

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