Is money demand in Taiwan stable?

Is money demand in Taiwan stable? Moreover, is money a luxury goods in Taiwan such that the income elasticity is greater than one? A casual application of Goldfeld type of money demand to the Taiwanese economy answers no to the first question and yes to the second one. This paper rigorously analyzes the money demand in Taiwan and attempts to provide more accurate answers to these questions. We employ both the ARMAX and cointegration models to study the money demand and use the rolling estimation approach to examine the stability of parameter estimates over time. Furthermore, we take into account the impact of stock market on money demand. Our empirical analysis concludes that the money demand in Taiwan is stable and that the income elasticity is less than one. Wrongly including a constant term within a dynamic model with lagged values of the dependent variable as regressors results in unstable estimates over time. In addition, the stock market is confirmed to have a significant impact on the demand of money.