Money Demand Determinants Model in Palestine during the Period: 3rd Quarter Year 2009 to 4th Quarter Year 2020 رسالة ماجستير

Abstract

This research studies the demand for money and its stability in Palestine by comparing narrow and broad money respectively where the main goal is to stimulate economic growth using the required monetary policies. Hence, if money demand changes are predictable then money supply targeting could be a reliable strategy to attain a stable inflation rate. The autoregressive distributed lag (ARDL) method was adopted to explain the cointegration framework using time series data over the period 2009Q3- 2020Q4 taken from the Palestinian monetary authority and Jordanian central bank. The bounds testing result show that only a short-run relationship exists between money demand and its explanatory variables: real income and nominal interest rate. The error correction model (ECM) reveals the sign of each variable, the coefficient of real income appears to be negatively inelastic not as expected, while the real interest rate coefficient is negatively inelastic; this indicates that households fear to invest in this course of the economy, where the precautionary motive for holding money is very high. The risk of investment comes from not having a domestic currency which creates an uncertain environment for all economic agents, hereby restricting the Palestinian monetary authority to use the required monetary tools to control inflation rates and drive economic growth thus stabilizing the economy. Finally, the study reveals that money demand function is not stable in Palestine, and hence the monetary authority should use interest rate as the most appropriate instrument for the conduct of monetary policy, whereas real output does not respond instantaneously to an increase in the money supply. The research also recommends the Monetary Authority to target inflation by moving reserve requirements, as they could influence the amount of bank lending to sustain a financial stability in Palestine