Abstract
In this paper we use the cointegration approach to estimate a money demand function for Algeria over the period 1988-2004. The results indicate that there is a long-run cointegrating relationship (equilibrium) for real broad money (M2) in Algeria. The long-term cointegrating vector indicates that income elasticity is larger than unity, a result that is consistent with empirical findings in the literature. In addition, the results indicate a positive relationship between real money and all of real GDP, deposits interest rates and inflation rates. While real GDP is retained to proxy for the scale dimension, deposits interest rates and inflation rates are retained to control for own rate of money and opportunity cost of holding money, respectively. However, even though the finding of positive relationship between real broad money and inflation rates is not popular in the literature, it implies that money balances increase with prices for the case of Algeria. The results also show that real money is weakly exogenous, while inflation rates and outputs are not. This finding suggests that, in the short-run, inflation rates in Algeria are not determined by monetary factors; instead, they are determined by structural factors related to the demand and supply of output.
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