THE MONEY DEMAND FUNCTION IN SURINAME SANJAY GAURISANKAR AND

The empirical literature on the money demand function pertains mainly to large, closed and advanced economies and developing economies. The empirical findings on the experience of very small open developing economies are therefore limited. This study fills that gap by estimating a money demand function for Suriname and by assessing the stability between real money demand (RM0, RM1 and RM2) and its determinants, namely real gross domestic product (RGDP), real exchange rate (RER) and real lending rate (RLR). Two co-integration approaches are applied to analyze the real money demand for the period 1981-2010. Consistent with money demand theory, empirical evidence reveals that in the long run real broad money growth is positively linked to RGDP growth, while real demand for money responds inversely to RER changes and RLR. In the short run, real money demand is influenced by RGDP growth and RER changes. Stability tests on the real money demand function seem to suggest that a lack of stability exists in the coefficients. Consequently, monetary targeting alone is not considered a policy option, while interest rate policy may be ineffective given the statistically insignificant impact on real money demand. Since income elasticity is greater than one and real exchange rate influences real money demand in the short and long run, a combination of income-related fiscal policy measures, exchange rate targeting and money demand management seems to be more effective in Suriname to establish macroeconomic stability