Money demand and savings in an open economy
| dc.contributor.advisor | Gochoco, Ma. Socorro H. | |
| dc.contributor.author | Sutarto, Budi Herry | |
| dc.date.accessioned | 2024-11-07T08:20:56Z | |
| dc.date.available | 2024-11-07T08:20:56Z | |
| dc.date.issued | 1990-01 | |
| dc.description.abstract | This study attempts to specify and estimate money demand and financial savings functions in an open economy framework. The price forecasting equation and the equation for the money demand and financial savings are estimated jointly with cross equation parameter constraints. A stability test is also performed to see the potential structural change in both money demand and saving equations after the monetary reform. The price forecasting equation is specified based on the information set available as to the movements of prices, money supply, income and interest rates in the past. The demand for money is specified as a function of gross domestic product, domestic real interest rates, expected inflation rates, terms of trade, and interest rate differential. In addition, the savings function is formulated to depend upon gross domestic product, domestic real interest rates, expected inflation rates, interest rate differential, and the number of branch office of banks. The model is deduced from a portfolio model of the financial market using quarterly data. The price forecasting equation is estimated using ordinary least squares (OLS) technique. The joint estimation of money demand and savings equations with respect to price equation are estimated using a seemingly unrestricted regression technique. The empirical results show that demand for money is affected not only by changes in domestic variables such as income (GDP), domestic real interest rates and the expected price but also by fluctuations in terms of trade and foreign interest rates. Thus, ignoring the effects of foreign variables not only leads to misspecification of the demand for money, but also to the implicit conclusion that monetary authorities have very little room to offset capital mobility induced by changes in domestic or foreign interest rates or terms of trade. The elasticity of the demand for money with respect to the explanatory variables indicate the strength of the counteracting forces among them. It is found that domestic interest rate elasticity of money demand is greater compared to foreign interest rate elasticity. This suggests that domestic monetary policy remained sufficiently effective to guard the foreign monetary movements. This finding is in contrast to the supply- sider's view that domestic monetary policy is fairly ineffective to changes in foreign monetary developments. Meanwhile, the long-run elasticity of money demand with respect to income is recorded greater than unity, indicating that the monetization process is likely to occur slowly due to the lack of people's banking habit. There may be little or no economies of scale in holding money because of capital market imperfections. The speed of adjustment of M1 and M2 can be categorized as a slow adjustment. Approximately only 4 percent of the discrepancy between the actual and desired demand for narrow money is eliminated in one quarter, and 6 percent in the case of demand for broad money. This refers to scarcity of alternative financial assets. The coefficient on the foreign interest rate is also found to be larger than the coefficient on the domestic interest rate in the savings equation, implying that the effect of changes in the foreign interest rate on savings is more sensitive than that of changes in domestic interest rate in portfolio decision. It follows that domestic interest rate management has to be directed to narrow down the gap between foreign and domestic interest rates. The growing number of banks is found to be highly significant in affecting the domestic savings rates. | |
| dc.identifier.uri | https://selib.upd.edu.ph/etdir/handle/123456789/886 | |
| dc.language.iso | en | |
| dc.title | Money demand and savings in an open economy | |
| dc.title.alternative | The case of Indonesia: 1977-1988 | |
| dc.type | Thesis |