How Do Domestic and Foreign Interest Rate Volatilities Affect Money Demand Function in South Africa

This paper investigates the relationship between domestic interest rate volatility, foreign interest rate volatility, and money demand in South Africa. This is done employing the unrestricted error-correction model and bounds testing approach to cointegration proposed by Pesaran et al. (2001). We use moving-average standard deviation method to generate the domestic interest rate volatility and foreign interest rate volatility measures. The results suggest that the measure of the volatility of interest rate on domestic money is negatively related to the money demand. This could induce some investors to shift part of their wealth out of nominal assets, including money, into tangible assets like commodity inventories. On the other hand, the foreign interest rate volatility measure is not significantly related to money demand function in South Africa. Finally, we use Brown et al.’s (1975) cumulative sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests to consider the stability of the coefficients. Our findings report that the money demand function is stable in South Africa

کلیدواژه ها:

South Africa ، money demand ، autoregressive distribution lag (ARDL) ، interest rate volatility