Instability of Money Demand: Recent Evidence for Thailand

This study examines the short-run and long-run stability properties of money demand in Thailand using the monetary aggregates M1, M2 and M3, for the period from 1993Q1 to 2012Q4. We use the dynamic OLS specification of Stock and Watson (1993) and Ball (2001), and the estimation technique of the Johansen cointegration test to determine the stability of money demand. The results from the Johansen cointegration test reveal that there is only a long-run relationship between M1 money demand and real GDP (a proxy for real income) and interest rate. In the short run, only a change in real GDP affects M1 money holdings. In the long-run both real GDP and an interest rate determine money demand. The short-run instability of M1 money demand makes it difficult for the monetary authorities to use M1 as an intermediate target to control intermediate-run and long-run inflation.