Financial reforms and money demand: Evidence from 20 developing countries

The effects of financial reforms on money demand (M1) are analysed with estimates for two sets of sub-samples and two break dates for twenty developing Asian and African countries. In all cases, the magnitude of income elasticity does not change significantly when compared with sub-samples and whole sample periods. Using CUSUM and CUSUMSQ tests, we find that the demand for money functions in our selected countries are temporally stable and therefore the respective monetary authorities may target money supply as the conduct of monetary policy.

► We study the effects of financial reforms on money demand (M1) for twenty developing Asian and African countries. ► The selected break dates are 1989 and 1995. ► The magnitude of income elasticity is fairly consistent in alternative sub-samples and whole sample periods. ► Stability tests revealed that the M1 demand functions in our selected countries are temporally stable. ► On policy front, the respective monetary authorities may consider targeting the supply of money instead of the rate of interest.