Income-level analysis of money demand stability in Sub-Saharan Africa using cross-sectional ARDL

James Okechukwu Abugu, Fidelis U. Amahi, Johnson Ifeanyi Okoh, Oyakhiromhe Bamidele Agbadua, Emmanuel Samuel Udo, Ifeanyi Onyemere

Abstract


Relevance. The stability of money demand is essential for effective monetary policy, especially in Sub-Saharan African (SSA) countries that face various economic challenges. These challenges include volatile exchange rates, fluctuating foreign interest rates, and high inflation, all of which can disrupt money demand stability. Understanding how these dynamics interact with different income levels—upper middle, lower middle, and low—is crucial for developing effective regional monetary policies and achieving economic stability.

Research Objective. This study aims to evaluate the stability of money demand across different income levels—upper middle, lower middle, and low—in SSA. By applying the cash-in-advance theory, the study seeks to provide insights and actionable policy recommendations on the influence of key economic variables.

Data and Method. This study employs the cross-sectional augmented autoregressive distributed lag (CS-ARDL) model to analyze both the short- and long-run influences of real exchange rates, foreign interest rates, real GDP, and inflation on money demand. By doing so, it aims to provide a nuanced understanding of money demand stability, capturing variations often overlooked in existing research. The analysis uses data from the World Bank Indicators and the International Monetary Fund (IMF), allowing for a detailed examination of money demand stability across various income levels in the region.

Results. The findings reveal a positive and significant relationship between the real exchange rate, foreign interest rates, real gross domestic product, and real monetary aggregates. However, inflation has a contractionary effect on the real monetary aggregate, destabilizing money demand. Money demand stability is observed in upper-middle and low-income countries, while lower-middle-income countries exhibit variability, indicating differing levels of economic resilience across income categories.

Conclusion. The study recommends adopting unified monetary policies and a single currency to enhance stability and stimulate economic growth in the region. Additionally, implementing inflation-targeting policies can further strengthen economic stability and promote sustainable development in SSA.


Keywords


money demand, sub-Saharan Africa, real monetary aggregate, foreign interest rate, inflation rate

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References


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DOI: https://doi.org/10.15826/recon.2024.10.3.020

Copyright (c) 2024 James Okechukwu Abugu, Fidelis U. Amahi, Johnson Ifeanyi Okoh, Oyakhiromhe Bamidele Agbadua, Emmanuel Samuel Udo, Ifeanyi Onyemere

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