another view of money demand and black market premium relationship: What can they say about credibility?
Bank of Albania
This paper examines the long-run demand for money under the assumption that exchange rates provide a measure of the cost of holding money. Using the autoregressive distributed lag (ARDL) and bound testing approach to cointegration on quarterly data for 8 emerging economies, this paper investigates the behavior of money demand in the wake of short-run fluctuations in the foreign exchange black market premium. In this respect, it proposes a new method to test the credibility of economic policies designed and implemented by authorities in the countries of interest. The test consists in introducing the black market premium, rather than the exchange rate directly, into the money demand function, and estimating its error correction form.
Key words: money demand, foreign exchange black market premium, cointegration
JEL classification: E52, E61, F 31, F41
Acknowledgements: The author would like to thank Mohsen Bahmani and Rebecca Neumann for their useful comments and suggestions in this research project as well as George Hondroyiannis for his useful comments and suggestions on future research. The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Greece and the Bank of Albania. I alone am responsible for the remaining errors and omissions.
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