Title: Macroeconomic uncertainty, excess liquidity and stability of money demand (M3) in Australia

Authors: Fassil Fanta

Addresses: Social Science Department, University of Wisconsin Stout, 712 South Broadway St., Menomonie, WI 54751, USA

Abstract: There has been limited research that explains the breakdown of the relationship between M3 and real activity after the financial deregulation in Australia. This paper contributes to the existing body of literature by examining the stability of money demand as a function of real income, interest rate and economic uncertainty index. We use the Johansen procedure of cointegration to estimate the long-run stationary relationship between an Australian monetary aggregate (M3) and the explanatory variables. We use the GARCH (1, 1) model to construct an economic uncertainty index. When we account for economic uncertainty, our results establish a long-run equilibrium relationship for the post-deregulation and for the entire sample period, and show an improvement in excess liquidity. Our result has an implication for reopening an important policy question on the viability of framing monetary policy around monetary aggregate.

Keywords: economic uncertainty index; money demand; financial deregulation; cointegration; macroeconomic uncertainty; excess liquidity; demand stability; Australia; M3; real income; interest rates; monetary policy; monetary aggregate.

DOI: 10.1504/IJMEF.2012.052499

International Journal of Monetary Economics and Finance, 2012 Vol.5 No.4, pp.325 - 344

Received: 14 Jun 2012
Accepted: 24 Sep 2012
Published online: 06 Mar 2013 *

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