This paper examines the stability of the demand for money in the United States by incorporating economic policy uncertainty (EPU) and monetary policy uncertainty (MPU) into the traditional money demand function. Using monthly data from 1987 to 2020, the study extends the literature by investigating both the symmetric and asymmetric effects of policy uncertainty on the real money aggregate (M2) for the first time. The analysis employs the Auto-Regressive Distributed Lag (ARDL) and Nonlinear Auto-Regressive Distributed Lag (NARDL) models, along with CUSUM and CUSUMSQ stability tests, to capture both short-run and long-run dynamics. Our findings reveal that while monetary policy uncertainty leads to an increase in money holdings in the short run, economic policy uncertainty reduces the demand for money as individuals shift to safer assets. In the long run, the effects of inflation and real effective exchange rates persist, while policy uncertainty shows no sustained impact. These results have significant implications for monetary policy formulation.
References
[1]
Arango, S., & Nadiri, M. I. (1981). Demand for Money in Open Economies. Journal of Monetary Economics,7, 69-83.
[2]
Bahmani, S., & Kutan, A. M. (2010). How Stable Is the Demand for Money in Emerging Economies? Applied Economics, 42, 3307-3318. https://doi.org/10.1080/00036840802112406
[3]
Bahmani-Oskooee, M., & Harvey, H. (2011). Exchange-Rate Volatility and Industry Trade between the US and Malaysia. Research in International Business and Finance, 25, 127-155.
[4]
Bahmani-Oskooee, M., & Maki-Nayeri, M. (2018). Policy Uncertainty and the Demand for Money in Korea: An Asymmetry Analysis. International Economic Journal, 32, 219-234.
[5]
Bahmani-Oskooee, M., & Pourheydarian, M. (1990). Exchange Rate Sensitivity of the Demand for Money in Developing Countries. Applied Economics, 23, 1377-1384. https://doi.org/10.1080/00036849100000060.
[6]
Bahmani-Oskooee, M., Kutan, A. M., & Xi, D. (2013). The Impact of Economic and Monetary Uncertainty on the Demand for Money in Emerging Economies. Applied Economics,45, 3278-3287.
[7]
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131, 1593-1636.
[8]
Baumol, W. J. (1952). The Transactions Demand for Cash: An Inventory Theoretic Approach. The Quarterly Journal of Economics, 66, 545-556. https://doi.org/10.2307/1882104
[9]
Bernanke, M., Duke, C. M., Fisher, M., Kohn, M., Kroszner, M., Pianalto, M.et al. (2008). Meeting of the Federal Open Market Committee on December 15-16, 2008. In Meeting of the Federal Open Market Committee.
[10]
Brüggemann, I., & Nautz, D. (1997). Money Growth Volatility and the Demand for Money in Germany: Friedman’s Volatility Hypothesis Revisited. Review of World Economics, 133, 523-537. https://doi.org/10.1007/bf02707501
[11]
Choi, W. G., & Oh, S. (2003). A Money Demand Function with Output Uncertainty, Monetary Uncertainty, and Financial Innovations. Journal of Money, Credit, and Banking, 35, 685-709. https://doi.org/10.1353/mcb.2003.0034
[12]
Crockett, A. D., & Evans, O. J. (1980). Demand for Money in Middle Eastern Countries (La demande de monnaie dans les pays du Moyen-Orient) (Demanda de dinero en paises del Oriente Medio). Staff Papers—International Monetary Fund, 27, Article 543. https://doi.org/10.2307/3866762
[13]
Friedman, H. L. (1983). The Self-Expansive Level Form: A Conceptualization and Measurement of a Transpersonal Construct. The Journal of Transpersonal Psychology, 15, Article 37.
[14]
Greiber, C., & Lemke, W. (2005). Money Demand and Macroeconomic Uncertainty. Dt. Bundesbank Press and Public Relations Division.
[15]
Güven, A. B. (2012). The IMF, the World Bank, and the Global Economic Crisis: Exploring Paradigm Continuity. Development and Change, 43, 869-898. https://doi.org/10.1111/j.1467-7660.2012.01776.x
[16]
Hossain, A. A., & Arwatchanakarn, P. (2020). The Effect of Economic Uncertainty on Narrow Money Demand and Its Stability in New Zealand: An Empirical Investigation. Economic Analysis and Policy, 68, 88-100. https://doi.org/10.1016/j.eap.2020.09.002
[17]
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Macmillan.
[18]
Kia, A. (2024). Demand for Money in the United States: Stability and Forward-Looking Tests. Economies, 12, Article 49. https://doi.org/10.3390/economies12020049
[19]
Lubu, G. L., Mabala, E. M., Onim, J. P. N., & Ambroise, E. (2023). Fundamentals and Misalignment of the Real Effective Exchange Rate in the Democratic Republic of Congo. Modern Economy, 14, 427-454. https://doi.org/10.4236/me.2023.144025
[20]
Moreno, P. (2013). The Metamorphosis of the IMF (2009-2011). Estudioseconômicos.
[21]
Mundell, R. A. (1963). Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates. Canadian Journal of Economics and Political Science, 29, 475-485. https://doi.org/10.2307/139336
[22]
Murad, S. M. (2021). Asymmetric Effects of Economic Uncertainty on Money Demand Function in Bangladesh: A Nonlinear ARDL and Cumulative Fourier Causality Approach. International Journal of Business & Economics,20, 201-213.
[23]
Murad, S. M. W., Salim, R., & Kibria, M. G. (2021). Asymmetric Effects of Economic Policy Uncertainty on the Demand for Money in India. Journal of Quantitative Economics, 19, 451-470. https://doi.org/10.1007/s40953-021-00235-1
[24]
Özdemir, K. A., & Saygılı, M. (2013). Economic Uncertainty and Money Demand Stability in Turkey. Journal of Economic Studies, 40, 314-333. https://doi.org/10.1108/01443581311283943
[25]
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326. https://doi.org/10.1002/jae.616
[26]
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. In Festschrift in Honor of Peter Schmidt (pp. 281-314). Springer. https://doi.org/10.1007/978-1-4899-8008-3_9
[27]
Tobin, J. (1956). The Interest-Elasticity of Transactions Demand for Cash. The Review of Economics and Statistics, 38, 241-247. https://doi.org/10.2307/1925776
[28]
Yan, W. (2023). The Impact of Monetary Policy Uncertainty on Corporate Financialization—Evidence from China. Open Journal of Business and Management, 11, 494-519. https://doi.org/10.4236/ojbm.2023.112026
[29]
Zhang, A. (2023). Economic Policy Uncertainty and Venture Capital: Evidence from China. Open Journal of Business and Management, 11, 1495-1509. https://doi.org/10.4236/ojbm.2023.114082
[30]
Zhou, D., & Jiang, Y. (2020). Research on the Relationship between China’s Economic Policy Uncertainty and Stock Market. Journal of Financial Risk Management, 9, 462-479. https://doi.org/10.4236/jfrm.2020.94025
