Long-and short-run demand for currency by the non-bank private sector

Abstract

A study of the demand for currency which differs in two ways from other studies is reported. First, the long-run demand is specified solely as a function of a transactions variable unlike other studies which typically include the rate of interest in its long-run function. The reason for this specification stems from the fact that cointegration tests reject the interest rate variable as a long-run determinant of the demand for currency. Second, this study does not assume a constant speed of adjustment in the short-run demand equation. Instead, the empirical analysis supported the hypothesis that the role of the rate of interest is to influence the demand for currency in the short run, by affe..