Abstract

This paper investigates empirically the impact of exchange rate changes on the money demand of seven Asian countries over the quarterly period, 1973 – 2009. Estimates of the cointegrating relations are obtained using different estimators and the error-correction technique was used to obtain the estimates of the short-run dynamics. The major results show that increases in the exchange rate, exert a significant positive effect upon money demand in both the long-run and the short-run in each of the seven countries. Further, domestic interest rates are found to have significant negative effect on the demand for money. These effects may result in significant reallocation of resources by monetary authorities and market participants. Our results provide justifications for the monetary authorization to pay attention to broad money.

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