Exploring the Stability of Money Demand Function for GCC Countries

Abstract

It is imperative to explore the stability of the money demand function (MDF) due to its effectiveness in the strength of monetary policy. This paper employs the ARDL approach to examine whether the M3 MDF is stable for the Gulf Cooperation Council (GCC) consisting of six Arabian Gulf countries. The paper also uses CUSUMSQ and CUSUM tests for this purpose. Unit root test results indicate that variables have unit roots with varying degrees. The results reveal that M3 has a cointegration relation with inflation and real output, however, the interest rate is statistically insignificant for most countries across the period under study. However, the CUSUM and CUSUMSQ tests indicate that M3 MDF is unstable across all the GCC countries. It implies that the governments in GCC countries have to be very careful in implementing monetary policy to achieve stability and growth targets.