Where Has All the Money Gone? Wealth and the Demand for Money in South Africa

Posted: 31 Dec 2008

See all articles by Stephen Hall

Stephen Hall

University of Leicester - Management Centre

George Hondroyiannis

Bank of Greece

P. A. V. B. Swamy

affiliation not provided to SSRN

G. S. Tavlas

Bank of Greece

Date Written: January 2009

Abstract

After an upward trend for about 25 years, the income velocity of money in South Africa reversed its course in 1994 and began a steep decline that continues to the present day. Some writers have argued that the change in income velocity is symptomatic of an unstable demand for money. The implication of this argument being that movements in the money supply provide little useful information about medium-to-long-term inflationary developments. We argue otherwise. Our basic premise is that there is a stable demand-for-money function but that the models that have been used to estimate South African money demand are not well specified because they do not include a measure of wealth. Using two empirical methodologies-a co-integrated vector equilibrium correction approach and a time-varying coefficient approach-we find that a demand-for-money function that includes wealth is stable. Consequently, our results suggest that the present practice of the South African Reserve Bank whereby M3 is used as an information variable in the Bank's inflation-targeting framework is well placed.

Keywords: C01, C12, C32, E41

Suggested Citation

Hall, Stephen G. and Hondroyiannis, George and Swamy, P.A.V.B. and Tavlas, George, Where Has All the Money Gone? Wealth and the Demand for Money in South Africa (January 2009). Journal of African Economies, Vol. 18, Issue 1, pp. 84-112, 2009, Available at SSRN: https://ssrn.com/abstract=1318098 or http://dx.doi.org/ejn008

Stephen G. Hall

University of Leicester - Management Centre ( email )

Leicester
United Kingdom

George Hondroyiannis

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

P.A.V.B. Swamy

affiliation not provided to SSRN

No Address Available

George Tavlas

Bank of Greece ( email )

21 E. Venizelos Avenue
GR-10250 Athens
Greece
+30 10 323 7224 (Phone)
+30 10 323 3025 (Fax)

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