Investigating Long-Run Money Demand and Its Policy Implications for the Proposed Monetary Union in West Africa: Evidence from Macro Panel Data Techniques

Abstract

ABSTRACT At the nucleus of the ongoing process of establishing a monetary union in West Africa are the harmonization of the institutional and operational mechanisms of monetary policy across member states and the determination of an appropriate monetary policy regime that would ensure the effective conduct of a common monetary policy. In-depth knowledge of the demand for money balances in the region is crucial in making an informed decision on the choice of the policy regime. This study investigates long-run money demand in the region and its implications for the conduct of a common monetary policy in the proposed monetary union. It employs a range of macro panel data methods, including pooled mean group (PMG), mean group (MG), and dynamic fixed effects (DFE) estimators. The baseline analysis is predicated on the common correlated effects mean group (CCEMG) estimator that accommodates heterogeneity and cross-sectional dependence. The robustness of the results is ascertained by adopting the augmented mean group (AMG) estimator and using a higher frequency dataset. The study finds that income levels and inflation exert significant influence on people’s desire to hold money balances in the region. Recursive estimations of the panel model reveal that the money demand function exhibits instability.