Long and Short-Run Determinants of Money Demand in New Zealand: Evidence from Cointegration Analysis

The existence of a stable demand for money is very important for the conduct of monetary policy even in this new era of inflation targeting. It is argued that previous work on the demand for money in New Zealand has been either not very satisfactory in a number of ways or outdated. This paper examines the long-run determinants of the demand for M3 employing the Johansen cointegration technique and quarterly data for the period 1988:1-2002:2. This paper finds, inter alia, that the demand for money is cointegrated with real income, the spread between interest on money and on non-money assets, the expected rate of inflation, and the real effective (trade weighted index) exchange rate.