Reexamine the Stability of Money Demand - The Case of Taiwan

邱翊銘(I-Ming Chiu)

《台灣經濟論衡》 4卷11期 (2006/11) Pp. 37-58

摘要

This paper attempts to echo the stability of the demand-for-money function as an important macroeconomic subject. In the case of Taiwan, the stability issue becomes essential in delivering successful monetary policy since the broad monetary aggregate, M2, is used as an intermediate target by the monetary authority. Stability in the money demand implies that the monetary policy can exert its impacts on the ultimate goals such as price stability and economic growth effectively. In the present study, we employ the ARDL Bounds Testing Approach on the demand-for-money function combined with CUSUM and CUSUMSQ tests to show that not only M2 is cointegrated with income, interest rate, and a stock index measure, but also the estimated ARDL money demand model is stable within the estimation period (1981:Q1-2004: Q4) as well. In addition, an out-of-sample forecast (2005:Q1-2006: Q2) is utilized to confirm the validity of the ARDL model. The results show that real money balance can be well-traced based on its determinants.