Some Empirical Evidence on the Demand for Money in the Pacific Island Countries

Abstract

This paper explores the stability of the demand for narrow money in the Pacific Island Countries viz, Fiji, Vanuatu, Samoa, Solomons and Papua New Guinea (PNG). The results from the time series approaches of LSE-Hendry’s General to Specific (GETS) and Johansen’s Maximum Likelihood (JML) suggest that real income, nominal rate of interest and real narrow money, are cointegrated. The CUSUM and CUSUMSQ stability test results indicate that the demand for money functions for these countries are stable and therefore the respective monetary authorities may consider targeting money supply in their conduct of monetary policy.Cointegration, Demand for Money, General to Specific Method and Johansen Maximum Likelihood Method