Money Demand Function in the Egyptian Economy: Stability Testing and Economic Implications

Abstract

The stability of the money demand function has a significant importance at the stage of formulation and selecting variables targeted by monetary policy to achieve its objectives accurately. This study applies the ARDL approach in testing cointegration between the variables of money demand function, and applies in testing the stability relationship between the quantity of money, the real per capita income, the interest rate and the general price level, the CUSUM and CUSUMQ stability tests. The results showed that the demand for money in the Egyptian economy was stable during the study period from 1965 to 2017.

This stability is a strong justification for monetary policy in Egypt to adopt a policy of direct Money Targeting instead of applying the inflation targeting policy, which is more effective in the case of instability of demand for money.