Economic Uncertainty and the Demand for Money in BRICS Countries

Economic uncertainty is being concerned due to the prolonged impacts of financial reforms in the past, which in turn give rise to the proposal of revising the conventional money demand function. This study examines the significance of economic uncertainty, as one of the determinants of money demand function in Brazil, Russia, India, China, and South Africa, namely BRICS countries by determining the long-run relationship between the real money demand (real broad money or RM2) and the economic uncertainty, and other control variables as well. Quarterly data is employed in this study starting from 2001:Q1 to 2018:Q4. The Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model, specifically GARCH (1, 1) model is employed as preliminary test to extract the volatilities from the macroeconomic variables and hence, construct the Economic Uncertainty Index (EUI). The long-run relationship is determined through the Autoregressive Distributed Lag (ARDL) approach. The result shows there is a long-run relationship between the real money demand and the economic uncertainty. Stable real money demand function in BRICS countries are established through the CUSUM and CUSUMSQ tests. Thus, EUI able to assist RM2 on refining the effectiveness of monetary policy in BRICS countries. As well, RM2 is evidently appropriate to be used as indicator while implementing monetary policy