Estimating the Transitional Dynamics of Money Demand in Ghana

The theoretical fundamentals of money demand functions extrapolate how economic agents may choose to demand and hold money rather than other liquid assets. The selection of choices however, depends on the underlining structure and stability of the monetary mechanism of a given economy. The raison d'être of the research was to investigate the transitional dynamics of money demand in the Ghanaian economy. The scale variables used in the estimations are real money balances and real GDP while the opportunity cost variables include exchange rate and inflation rate. The empirical results from the long run Johansen cointegration causality revealed the existence of “at least” three cointegration vectors. A comparative analysis of OLS and ARDL was estimated and the residuals extracted for the short run ECM estimations. The coefficients of real GDP, exchange rate and inflation from the long and short run examination were robust and significant at different magnitudes. The CUSUM, CUSUMQ and Chow test of stability showed money demand to be somewhat stable in the Ghanaian economy from 1983 to 2013. The study strongly recommended that narrow money should be used as monetary aggregates targeting in the Ghanaian economy