Money demand function versus monetary integration: Revisiting panel cointegration among GCC countries

This paper applies the newly developed panel cointegrated technique [R. Larsson, J. Lyhagen, M. Lothgren, Likelihood-based cointegration tests in heterogeneous panels, Econom. J. 4 (1) (2001) 109–142] that allows for multiple cointegrated relationships to empirically re-examine the long-run money demand function for six selected countries of the Gulf Cooperation Council (GCC) in 1979–2000. At the center of focus is a discussion on the regional money demand phenomena with challenges and potential benefits, because of these GCC member adoption this monetary integration policy. It is determined that there are at least two cointegrated relations in the four-dimensional vector error correction model for the variables of the real money balance, the real scale variable, the nominal interest rate, and the exchange rate. The coefficient restriction test is also conducted, and it substantiates that the full panel test significantly rejects the hypothesis of the quantity theory of money for the long-run elasticity of income equal to unity, and we are able to reject the null hypothesis when the semi-elasticities of the nominal interest rate and exchange rate are equal to zero. Some critical policy implications emerge from the results.