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 of Business


Economics Department

Degree Name

MA in Economics

Date of Award


Online Submission Date


First Advisor

William Mikhail

Committee Member 1

William Mikhail

Committee Member 2

Adel Beshai

Committee Member 3

Nagla E. Rizk

Document Type



139 leaves

Library of Congress Subject Heading 1

Monetary policy

Library of Congress Subject Heading 2

Inflation (Finance)


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Call Number

Thesis 1998/59



Included in

Economics Commons