THE DEMAND FOR MONEY : EVIDENCE FROM SMALL OPEN ECONOMIES

Abstract

There are many factors affecting money demand behavior. In this paper, we shall examine the money demand behavior in three small open economies. The selected economies are Singapore, Taiwan and Hong Kong. Many studies have been conducted to consider money demand functions in the big economies like the United States and Britain, but money demand functions in small open economies are rarely considered by researchers. What are the possible factors and circumstances that alienate money demand in small open economies from money demand in big economies? This is an issue raised and examined in this paper. Primarily, the income level and interest rates are factors that affect money demand in both small and big economies. Exchange rates, however, are rarely considered in the demand-for-money functions in big economies. We shall look into the effect of exchange rates on money demand in small open economies in more detail in this paper. As there is usually a time lag involved before people, in general, can change anything to adapt to a change, I have also considered certain money demand functions with lagged variables of income, interest rates, exchange rates and also past levels of money demand so as to find out how these variables affect current money demand behavior.