Volume 14, Number 1, June 2019
| Stability of Money Demand in South Korea: A Cointegrating Regression Approach |
Jun-De Lee¹*, Jui-Cheng Hung², Yi-Hsien Wang²*
Abstract
This paper examines the money demand functions in South Korea using three fully efficient cointegrating regression methods. We find that money demand and its determinants−real effective exchange rate, income, foreign interest rates, stock prices, and domestic interest rates−are cointegrated. Income and the exchange rate have a statistically significant positive effect on money demand, whereas domestic interest rates and stock prices have a statistically significant negative effect on money demand. Interestingly, the domestic interest rates are inelastic, implying that there is a limit to which monetary authorities can use the domestic interest rates to reduce South Korea’s money demand.
Keywords: Money demand, Stability, Cointegrating regression.
JEL Classification: E41, C22
¹ Department of Marketing and Logistics Management, Ming Hsin University of Science and Technology, Taiwan.
² Department of Banking and Finance, Chinese Culture University, Taiwan.* E-mail: wyx12@faculty.pccu.edu.tw