Impuesto Predial

Demand for money models have been tested extensively in empirical studies as one of the pillars of macroeconomic theory and policy modelling especially for monetary policy formulation and implementation. It has gained renewed interest due in part to advances in econometric applications. Bahmani-Oskooee and Chomsisengphet (2002) refer to the introduction of the cointegration technique and its application as a major boost for studies in both developed as well as less developed countries. The cointegration technique has become widely recognised in the assessment of the nature and stability of the long-run money demand function. In its original framework, evidence of cointegration has been taken to suggest a stable relationship between some measure of monetary aggregates and other determining variables such as real income, inflation, and interest rates. A few studies have also considered the money demand function in Africa. There have been some individual country studies including Domowitz and Elbadawi (1987) for Sudan, Adam (1992) for Kenya, Fielding (1999) for Cote d‘Ívoire, Henstridge (1999) for Uganda, Randa (1999) for Tanzania, Adam (1999) for Kenya, Nell (2003) for South Africa, Anoruo (2002), Akinlo (2006) and Nwafor, Nwakanma, Nkansah, and Thompson (2007), Kumar, Webber, and Fargher (2013), among others for Nigeria. Other studies have also

considered a group of African country (Arize, Darrat, & Meyer, 1990; Bahmani-Oskooee & Gelan, 2009; Fielding, 1994; Simmons, 1992).

A few studies have concentrated on Ghana such as Kovanen (2011), Dagher and Kovanen (2011), Bawumia and Abradu-Otoo (2003), Andoh and Chappell (2002), Ghartey (1998a) and Kallon (1992). These studies differ in terms of time period, choice of variables, data frequency, and methodological approach. Dagher and Kovanen (2011) employ the bounds testing procedure to test the stability of the long-run money demand using quarterly data from 1990Q1 to 2009Q4. The study reports a strong evidence of a stable and well-defined long-run money demand function based on cointegration between broad money (M2/M2+), prices, income, nominal effective exchange rate, and other interest rate variables in Ghana and US. Since the interest rate variables were found statistically insignificant, the model was estimated with money, income, and nominal exchange rates. A related study by Andoh and Chappell (2002) which covers 1960 - 1996, uses real per capita money stock (M2), real per capita income as ―transactions demand‖ variable and inflation or nominal interest rate as ―speculative demand‖ variable. The study established evidence of cointegration and reported that the demand for money in Ghana became less sensitive to inflation after 1983.

Ghartey (1998b) tests the stability of narrow money for 1970Q4 to 1992Q4 using the two-stage error correction mechanism. Variables included are narrow money, income and prices since inflation and interest rates were insignificant or wrongly signed. The study confirmed the price homogeneity property and long-run unit income elasticity. The exchange rate variable was also negatively correlated to money demand. Kallon (1992) also modelled a demand function for narrow money using real Gross National Product, discount rate and inflation as determinants, for 1966Q1 - 1986Q4. These studies have found the demand for money as income elastic and interest rate inelastic.

As financial markets become more open and integrated, the need to incorporate the contributions of international variables such as interest rates and exchange rates in money demand models has become imperative. The argument has been that the financial liberalization in most countries has made it easy and attractive to demand and use other currencies as a means of transactions. Consequently, money demand functions may become unstable which can render monetary policy ineffective. Studies that have sought to achieve this have followed the portfolio balance approach popularized by Cuddington (1983) and Branson and Henderson (1984) to explore the effects of stability of money demand models in the presence of currency substitution or capital mobility. Other studies had focused on money demand in Canada (for example, Bordo & Choudhri, 1982; Imrohoroglu, 1994; Miles, 1978).

A well-documented strand of the literature has sought to apply the model in investigating how expected changes in relative risks and returns among currencies lead economic agents to diversify their portfolios of domestic and foreign money balances, and the impacts that can have on the financial and economic structure of an economy. For example, the works of Ramirez- Rojas (1985), Melvin (1988), Melvin and Afcha (1989), Savastano (1996) provide evidence on currency substitution for Latin American countries. The model has also been adopted for studies by El-Erian (1988) for Egypt and Yemen Arab Republic, Mueller (1994) for Lebanon, Akçay et al. (1997) for Turkey, among others. Alami (2001) also sought to extend the model to differentiate currency substitution (holding foreign money as a medium of exchange) from dollarization (holding foreign money as a store of value) in a developing economy where foreign currency deposits earn a competitive rate of return.

Variants of models that account for developments in the external sector have been in existence for quite some time. For instance, Arango and Nadiri (1981) estimated the demand for money in

open economies by verifying the hypothesis that foreign financial aid and monetary influences on the demand for real cash balances are transmitted by changes in foreign interest rates and exchange rate expectations. The authors estimated the demand for real cash balances on real permanent income, short-term domestic interest rates, short-term foreign interest rates and the exchange rate, exchange rate expectations, inflationary price expectations. In their conclusion, it was argued that discarding the effects of foreign interest rates and exchange rate expectations might lead to demand for money misspecification.

Other studies have also attempted to define a proxy for currency substitution and modelled its demand in the domestic economy. In Elkhafif (2003), the share of nominal foreign currency in money supply was used as a variable for currency substitution and was modelled as a function of the nominal exchange rate, and the interest rate differential between the interest rate on local currency and that on the dollar within an error-correction framework for Egypt and South Africa. The study used the elasticity of the exchange rate as a measure of currency substitution and concluded that currency substitution does exist, although the elasticity was larger in South Africa than for Egypt. Yinusa and Akinlo (2008) also estimated different models of money demand for Nigeria. The study confirmed the presence of currency substitution in the domestic banking system in Nigeria. A major factor driving this process was exchange rate volatility especially real parallel market exchange rate volatility.

A recent argument based on the theory of asset demand by Baharumshah, Mohd, and Masih (2009) is that the demand for money should be a function of the resources available to individuals, including their wealth and the expected return on other assets relative to the expected returns on money such as stock returns. Their model of money demand with stock market prices suggested that real money balances are in long-run relationship with real income,

inflation, real foreign interest rates, and stock prices, pointing to the wealth effect of stock returns on the money demand function.