Journal of
Economics and International Finance

  • Abbreviation: J. Econ. Int. Finance
  • Language: English
  • ISSN: 2006-9812
  • DOI: 10.5897/JEIF
  • Start Year: 2009
  • Published Articles: 363

Full Length Research Paper

Empirical analysis of the elasticity of real money demand to macroeconomic variables in the United Kingdom with 2008 financial crisis effects

Aweda Nurudeen Olawale
  • Aweda Nurudeen Olawale
  • Department of Statistics, Yaba College of Technology, Lagos, Nigeria.
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Akinsanya Taofik
  • Akinsanya Taofik
  • Department of Statistics, Yaba College of Technology, Lagos, Nigeria.
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Akingbade Adekunle
  • Akingbade Adekunle
  • Department of Statistics, Yaba College of Technology, Lagos, Nigeria.
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Are Stephen Olusegun
  • Are Stephen Olusegun
  • Department of Statistics, Yaba College of Technology, Lagos, Nigeria.
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  •  Received: 26 April 2013
  •  Accepted: 14 July 2014
  •  Published: 31 August 2014

Abstract

 

This research work has employed vector error correction and cointegration techniques in order to estimate the elasticity of real money demand to macroeconomic variables such as industrial production index, exchange rates and short-term interest rates in the United Kingdom. Also, global financial crisis was introduced as an impulse variable to capture structural breaks inherent in the series. Empirical results showed that long-run relationships existed between real money demand and industrial production index, short-term interest rates, and exchange rates in the United Kingdom. The study showed that in the long-run, real money demand had more than unity elasticity with industrial production index in both economies. Real money demand has an inelastic relationship with short-term interest rates and exchange rates. Furthermore, results indicated that it would take long time for real money demand to adjust to its long-run equilibrium. Impulse response analysis revealed that any increase in short term interest rates will have negative effects on the real money demand in the medium to long-term. Whilst real money demand in the United Kingdom tend to be more significant in forecasting the Euro zone money demand, the latter tends to be negatively statistically significant in the former real money demand model.  The financial crisis witnessed globally had negative effects on real money demand in the United Kingdom.

 

Key words: Vector error correction, Cointegration, impulse response analysis, macroeconomic variables, long-run equilibrium, real money demand and financial crisis.