An empirical investigation of stability of money demand for GCC countries

Money demand stability attracts the attention of policy makers while deciding the right policy instrument for the monetary policy. The present study estimates the money demand function by using a time spam of 1980-2014 for the GCC countries. For this purpose, it uses the ARDL cointegration technique to find long-run relationships. The cointegration test has confirmed the long-run relationships in money demand functions for all GCC countries. In the long-run analysis, a positive income elasticity of money demand has been found in all GCC countries. Negative and significant semi-interest rate elasticity has been found in UAE, Bahrain, Qatar and Kuwait. Positive and significant exchange rate elasticity has been found in UAE and KSA and it has found negative in Qatar and Kuwait. Positive and significant inflation rate elasticity has been found in Kuwait and Bahrain and it has found negative in UAE, Oman and KSA. Short-run analysis also reveals some significant elasticities. Further, money demand function proofs stable in KSA and Oman and it remains unstable for the rest of GCC countries.