A RE-EXAMINATION OF THE DEMAND FOR MONEY IN FIJI

ABSTRACT

The demand for money is at the heart of how policy should be conducted effectively. Money demand serves as a conduit in the transmission mechanism for monetary policy so the stability of the money demand function is critical if monetary policy is to have predictable effects on inflation and real output. In most developed and developing countries, policymakers have frequently questioned whether the demand for money is stable. Generally, the majority of studies find that the demand for money is unstable and monetary aggregates have lost their influence in the conduct of monetary policy. In Fiji, for some time, the role of monetary aggregates as intermediate targets has been downplayed. However, there has been renewed interest in the stability of the demand for money in Fiji and so this paper’s objective is to re-examine this topical issue. Because of ongoing financial sector reforms1, the determinants of money demand in Fiji will be difficult to establish. Nevertheless, this paper aims to provide a sound theoretical and empirical basis for modeling the demand for money. This paper employs co-integration analysis to examine the stability of the demand for money. Additionally, the error correction technique is also used to confirm the findings of the co-integration analysis.