article · PLoS ONE
An investigation into the money demand function of Saudi Arabia covering the period from 1968 to 2016 explores the asymmetrical effects of real exchange rate movements. The findings demonstrate that income increases money demand, whereas inflation reduces it. In relation to exchange rates, a real appreciation of the US dollar generates a positive impact on domestic money demand, while a real depreciation leads to a negative effect. In addition, tests confirm that the hypotheses of income and price homogeneity do not apply to the estimated elasticities. Despite these asymmetries, the estimated model remains stable and conforms to theoretically expected relationships among determinants of money demand. Based on these observed empirical behaviours, controlling the money supply is recommended as an appropriate monetary policy instrument for the Saudi Arabian economy.
Understanding the factors governing money demand helps central banks and policymakers design effective macroeconomic strategies. Identifying how exchange rate fluctuations and inflation alter financial holdings ensures authorities can maintain currency stability and economic balance. Showing that the money demand model is stable allows policymakers to use money supply controls predictably to steer broader monetary policy.
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This present research investigates the money demand function of Saudi Arabia using a long period 1968-2016. In addition, the asymmetrical effects of real exchange rate changes have also been explored in the estimated money demand function. Our empirical results suggest that income and inflation have positive and negative effects on money demand respectively. Further, a real appreciation of US dollar has a positive effect but a real depreciation has a negative effect on the money demand. Furthermore, income and price homogeneity hypotheses do not hold for the estimated elasticities. Moreover, the estimated model is found stable with the theoretically expected effects of money demand's determinants. Therefore, we are suggesting money supply as a monetary policy instrument to the economy of Saudi Arabia.
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DOI: 10.1371/journal.pone.0207598
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