Revista Internacional de Economia e Ciências de Gestão

Determinants of Money Demand in Ghana

Abstract

Emmanuel Opoku

This paper examines the factors that influence money demand in Ghana using the ARDL approach as the baseline estimator. We find strong evidence of existence of long-run equilibrium relationship between money demand and its determinants. The results also indicate that expected inflation and real exchange rate are the key determinants of money demand both in the short-run and long-run. The role of real interest rate is only recognized in the long-run whereas the impact of financial innovation resulting from the on-going financial sector reforms only affect the transitional dynamics of the money market conditions. There is also an ample evidence of instability in the money demand relationship as a result of inflation and exchange rate volatility. Moreover, given that the wealth effect phenomena holds in Ghana, the paper concludes by suggesting that policies directed towards regulating and maintaining stable exchange rates and low and steady inflation would be necessary to maintain stable money demand and thus enhance the effectiveness of monetary policy in Ghana.