Determinants of Money Demand in Algeria: An Empirical Study during the Period (1980-2017)

Mohammed Djebbouri; Abdelkarim Mansouri; Abderrahmane Tahi

Mohammed Djebbouri Department of Finance and Banking, Moulay Tahar University, Saida, Algeria.
Abdelkarim Mansouri Department of Finance and Banking, Moulay Tahar University, Saida, Algeria.
Abderrahmane Tahi Department of Finance and Banking, Moulay Tahar University, Saida, Algeria.

Keywords: Determinants of money demand M2, cointegration, error correction model, shock analysis, Algeria

Abstract

This investigation aims primarily to estimate the determinants of the demand function of money in its broad sense, in Algeria during the period 1980-2017. To accomplish this study, Cointegration and Error Correction Model (ECM) have been used. Thus, these tests proved the no stationary of time series which led us to apply the cointegration tests, so in the end we estimate the model with error correction and investigate the impact of shocks on demand for money over the same period. The results of this estimation show that the importance of determinants of money demand in the short and long term are ordered as follows: Real income, the velocity of circulation of money (VM2) in the short and long term, the long-term exchange rate; in the short term its importance diminishes in favor of inflation, which has a decisive effect on the demand for money in the short term. The findings reveal that the money demand function is insensitive to the interest rate, which explains why speculation is generally regarded as a less important reason in Algeria.