International Journal of Business and Economics Volume 20, No. 3 December, 2021

Asymmetric Effects of Economic Uncertainty on Money Demand Function in Bangladesh: A Nonlinear ARDL and Cumulative Fourier Causality Approach

S. M. Woahid Murad

Department of Economics, Noakhali Science and Technology University, Noakhali, Bangladesh

Abstract

This study revisits the demand for money in Bangladesh considering economic uncertainty and covering 1999:M1 to 2018:M6. We employed a nonlinear ARDL model and cumulative Fourier causality tests. In contrast to the previous studies, we obtain higher exchange rate elasticity and lower income elasticity of money demand function. It is found that people hold less money in the short run when uncertainty increases, albeit it does not sustain in the long run. On the contrary, demand for money rises in the short run and declines in the long run when uncertainty decreases. We also find a unidirectional causality from income and economic uncertainty to money after considering the Fourier causality test. Therefore, a fiscal policy should be considered along with a monetary policy to tune Bangladesh’s economy.

Keywords：Money Demand, Output Uncertainty, Nonlinear ARDL, Fourier Causality, Bangladesh.

JEL Classifications：C22, E41.

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